Document:

EXHIBIT "C"

                             A.A.P.L. FORM 610-1982
                                     REVISED
                         MODEL FORM OPERATING AGREEMENT

                                   (MODIFIED)

                                 by and between
                                Cedar Ridge LLC,
                                    Operator
                                       and
                Skyline Resources, Inc., and Slaterdome Gas, Inc.
                                  Non-Operators

                               OPERATING AGREEMENT

                                      DATED

                               February 28, 2003,
                               ------------------

OPERATOR          CEDAR RIDGE LLC
                  --------------------------------------------------------------

CONTRACT AREA     FLY CREEK PROSPECT
                  --------------------------------------------------------------

                         Carbon County, State of Wyoming

                        Township 13 North, Range 88 West
                        --------------------------------
                      Sections 1 - 36 (The entire township)

                        Township 13 North, Range 89 West
                        --------------------------------
                      Sections 1 - 36 (The entire township)

                        Township 13 North, Range 90 West
                        --------------------------------
              Sections 1-3, 10-15, 22-27, and 34-36 (The E/2 of the
                                    township)

                        Township 12 North, Range 88 West
                        --------------------------------
                       Sections 1-24 (The entire township)

                        Township 12 North, Range 89 West
                        --------------------------------
                       Sections 1-20 (The entire township)

                        Township 12 North, Range 90 West
                        --------------------------------
            Sections 1-3, 10-15, and 22-24 (The E/2 of the township)

                        Moffat County, State of Colorado

                        Township 12 North, Range 89 West
                        --------------------------------
                       Sections 7-36 (The entire township)

                      COPYRIGHT 1982 - ALL RIGHTS RESERVED
                        AMERICAN ASSOCIATION OF PETROLEUM
                       LANDMEN, 4100 FOSSILE CREEK BLVD.,
                        FORT WORTH,TEXAS 76137, APPROVED
                       FORM A.A.P.L. NO. 610-1982 REVISED
<PAGE>

                                TABLE OF CONTENTS

Article   Title                                                             Page
-------  ------                                                             ----
I.DEFINITIONS................................................................1
  -----------

  II.    EXHIBITS ...........................................................1
         --------

 III.    INTERESTS OF PARTIES ...............................................2
         --------------------
         A.   OIL AND GAS INTEREST'S ........................................2
         B.   INTERESTS OF PARTIES IN COSTS AND PRODUCTION ..................2
         C.   EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS .....2
         D.   SUBSEQUENTLY CREATED INTERESTS ................................2

  IV. TITLES 2
         A.   TITLE EXAMINATION..............................................2
         B.   LOSSES ........................................................3
              1.  Losses.....................................................3

   V. OPERATOR 3
         A.   DESIGNATION AND RESPONSIBILITIES OF OPERATOR...................3
         B.   RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR..3
              1.  Resignation or Removal of Operator.........................3
              2.  Selection of Successor Operator............................3
         C.   EMPLOYEES......................................................3
         D.   DRILLING CONTRACT..............................................3

  VI. DRILLING AND DEVELOPMENT

         A.   INITIAL WELL...................................................4
         B.   SUBSEQUENT OPERATIONS..........................................5
              1.  Proposed Operations........................................5
              2.  Operations by Less than All Parties......................5-6-7
              3.  Stand - By Time............................................6
              4.  Sidetracking...............................................6
         C.   TAKING PRODUCTION IN KIND......................................6
         D.   ACCESS TO CONTRACT AREA AND INFORMATION........................7
         E.   ABANDONMENT OF WELLS...........................................7
              1.  Abandonment of Dry Holes...................................7
              2.  Abandonment of Wells that have Produced....................7
              3.  Abandonment of Non-Consent Operations......................7

 VII.    EXPENDITURES AND LIABILITY OF PARTIES...............................7
         -------------------------------------
         A.   LIABILITY OF PARTIES...........................................7
         B.   LIENS AND PAYMENT DEFAULTS.....................................8
         C.   PAYMENTS AND ACCOUNTING........................................8
         D.   LIMITATION OF EXPENDITURES.....................................8
              1.  Drill or Deepen............................................8
              2.  Rework or Plug Back........................................8
              3.  Other Operations...........................................8
         E.   RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES...........9
         F.   TAXES..........................................................9
         G.   INSURANCE......................................................9

VIII.    ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST....................9
         ------------------------------------------------
         A.   SURRENDER OF LEASES............................................9
         B.   RENEWAL OR EXTENSION OF LEASES.................................10
         C.   ACREAGE OR CASH CONTRIBUTIONS..................................10
         D.   MAINTENANCE OF UNIFORM INTEREST................................10
         E.   WAIVER OF RIGHTS TO PARTITION..................................11
         F.   PREFERENTIAL RIGHT TO PURCHASE.................................11

  IX.    INTERNAL REVENUE CODE ELECTION......................................11
         ------------------------------

   X.    CLAIMS AND LAWSUITS.................................................11
         -------------------

  XI.    FORCE MAJEURE.......................................................11
         -------------

 XII.    NOTICES 12

XIII.    TERM OF AGREEMENT...................................................12
         -----------------

 XIV.    COMPLIANCE WITH LAWS AND REGULATIONS................................12
         ------------------------------------
         A.   LAWS, REGULATIONS AND ORDERS...................................12
         B.   GOVERNING LAW..................................................12
         C.   REGULATORY AGENCIES............................................12

  XV.    OTHER PROVISIONS..................................................13-19
         ----------------

 XVI.    MISCELLANEOUS.......................................................19

<PAGE>

                               OPERATING AGREEMENT

     THIS AGREEMENT, entered into by and between Cedar Ridge LLC , hereinafter
designated and referred to as "Operator", and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually herein as
"Non-Operator", and collectively as "Non-Operators".

                                   WITNESSETH:

     WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent and
as hereinafter provided,

     NOW, THEREFORE, it is agreed as follows:

                                   ARTICLE 1.
                                   DEFINITIONS

     As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:

     A. The term "oil and gas" shall mean oil, gas, including coal bed gases,
casinghead gas, gas condensate, and all other liquid or gaseous hydrocarbons and
other marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.

     B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the
oil and gas leases and options to lease covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.

     C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.

     D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and gas
leasehold interests and oil and gas interests are described in Exhibit "A".

     E. The term "drilling unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as establish ed by the pattern of drilling in the Contract
Area or as fixed by express agreement of the Drilling Parties.

     F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.

     G. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.

     H. The terms "Non-Drilling Party" and "Non -Consenting Party" shall mean a
party who elects not to participate in a proposed operation.

     Unless the context otherwise clearly indicates, words used in the singular
include the plural, the plural includes the singular, and the neuter gender
includes the masculine and the feminine.

                                   ARTICLE II.
                                    EXHIBITS

     The following exhibits, as indicated below and attached hereto, are
     incorporated in and made a part hereof

A.   Exhibit "A", shall include the following information:

     (1)  Identification of lands subject to this agreement,

     (2)  Restrictions, if any, as to depths, formations, or substances,

     (3)  Percentages or fractional interests of parties to this agreement,

     (4)  Oil and gas leases and/or oil and gas interests subject to this
          agreement,

     (5)  Addresses of parties for notice purposes.

B.   Exhibit "B", plat of AMI

C.   Exhibit "C", Accounting Procedure.

D.   Exhibit "D", Insurance.

E.   Exhibit "E", Gas Balancing Agreement.

F.   Exhibit "F", Non-Discrimination and Certification of Non-Segregated
     Facilities.

G.   Exhibit "G", Form of Lease.

H.   Exhibit "H", Memorandum of Operating and Financing Statement

     If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

                                                                               1
<PAGE>

                                  ARTICLE III.
                              INTERESTS OF PARTIES

A.   Oil and Gas Interests:

     If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of oil and gas lease attached hereto as
Exhibit " H", and the owner thereof shall be deemed to own both the royalty
interest reserved in such lease and the interest of the lessee thereunder.

 B. Interests of Parties in Costs and Production:

     Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner, the
parties shall also own all production of oil and gas from the Contract Area
subject to the payment of royalties, overriding royalties and other payments
which shall be born by the parties to the extent set forth and provided in the
attached Exhibit "A".

     Regardless of which party has contributed the lease(s) and/or oil and gas
interest(s) hereto on which royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the Contract Area shall bear
and shall pay or deliver, or cause to be paid or delivered, to the extent of its
interest in such production, the royalty, overriding royalty and other payments
stipulated in Exhibit "A" and shall hold the other parties free from any
liability therefor. No party shall ever be responsible, however, on a price
basis higher than the price received by such party, to any other party's lessor
or royalty owner, and if any such other party's lessor or royalty owner should
demand and receive settlement on a higher price basis, the party contributing
the affected lease shall bear the additional royalty burden attributable to such
higher price.

     Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.

C.   Excess Royalties, Overriding Royalties and Other Payments:

     Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Exhibit "A", such party so burdened shall assume and alone bear all such excess
obligations and shall indemnify and hold the other parties hereto harmless from
any and all claims and demands for payment asserted by owners of such excess
burden.

D.   Subsequently Created Interests:

     If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and is
not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such interest
being hereinafter referred to as "subsequently created - interest" irrespective
of the timing of its creation and the party out of whose working interest the
subsequently created interest is derived being hereinafter referred to as
"burdened party"), and:

     1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, an or a portion of its working
interest and/or the production attributable thereto, said other party, or
parties, shall receive said assignment and/or production free and clear of said
subsequently created interest and the burdened party shall indemnify and save
said other party, or parties, harmless from any and all claims and demands for
payment asserted by owners of the subsequently created interest and,

     2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder. all provisions of Article VII.B. shall be enforceable
against the subsequently created interest in the same manner as they are
enforceable against the working interest of the burdened party.

                                   ARTICLE IV.
                                     TITLES

 A.  Title Examination:

     Title examination shall be made on the drillsite of any proposed well prior
to commencement of drilling operations or, if the Drilling Parties so request,
title examination shall be made on the leases and/or oil and gas interests
included, or planned to be included, in the drilling unit around such well. The
opinion will include the ownership of the working interest, minerals, royalty,
overriding royalty and production payments under the applicable leases. At the
time a well is proposed, each party contributing leases and/or oil and gas
interests to the drillsite, or to be included in such drilling unit, shall
furnish to Operator all abstracts (including federal lease status reports),
title opinions, title papers and curative material in its possession free of
charge. All such information not in the possession of or made available to
Operator by the parties, but necessary for the examination of the title, shall
be obtained by Operator. Operator shall cause title to be examined by attorneys
on its staff or by outside attorneys. Copies of all title opinions shall be
furnished to each party hereto. The cost incurred by Operator in this title
program shall be borne as follows:

  [] Option No. 1:
     -------------
     Costs incurred by Operator in procuring abstracts and title examination
(including preliminary, supplemental, shut-in gas royalty opinions and division
order title opinions) shall be a part of the administrative overhead as provided
in Exhibit "C" and shall not be a direct charge, whether performed by Operator's
staff attorneys or by outside attorneys.

                                                                               2
<PAGE>

                                   ARTICLE IV
                                    continued

     [X] Option No. 2:
     -----------------
     Costs incurred by Operator in procuring abstracts and all curative material
and fees paid outside attorneys, brokers, filing fees, etc. for title
examination (including preliminary, supplemental, shut-in gas royalty opinions
and division order title opinions) shall be borne by the Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such interests appear in Exhibit "A". Operator shall
make no charge for services rendered by its staff attorneys or other personnel
in the performance of the above functions.

     Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as the
conduct of hearings before governmental agencies for the securing of spacing or
pooling orders. This shall not prevent any party from appearing on its own
behalf at any such hearing.

     No well shall be drilled on the Contract Area until after (1) the title to
the drillsite or drilling unit has been examined as above provided, and (2) the
title has been approved by the Operator or title has been accepted by all of the
parties who are to participate in the drilling of the well, which acceptance
shall be made within seven (7) days of receipt of the title opinion. Failure to
respond within said seven (7) days shall be deemed to be acceptance.

B.   Losses:

     1. Losses: All losses incurred shall be joint losses and shall be borne by
all parties in proportion to their interests. There shall be no readjustment of
interests in the remaining portion of the Contract Area.

                                   ARTICLE V.
                                    OPERATOR

A.   Designation and Responsibilities of Operator:

     Cedar Ridge LLC shall be the Operator of the Contract Area, and shall
conduct and direct and have full control of all operations on the Contract Area
as permitted and required by, and within the limits of this agreement. It shall
conduct all such operations in a good and workmanlike manner, but it shall have
no liability as Operator to the other parties for losses sustained or
liabilities incurred, except such as may result from gross negligence or willful
misconduct.

B.   Resignation or Removal of Operator and Selection of Successor:

     1. Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed if it fails or refuses to carry out its duties
hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the
affirmative vote of two (2) or more Non-Operators owning a majority interest
based on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator. Such resignation or removal shall not become effective
until 7:00 o'clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or structure
of Operator or transfer of Operator's interest to any single subsidiary, parent
or successor corporation shall not be the basis for removal of Operator.

     2. Selection of Successor Operator Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected. The successor Operator
shall be selected by the affirmative vote of two (2) or more parties owning a
majority interest based on ownership as shown on Exhibit "A"; provided, however,
if an Operator which has been removed fails to vote or votes only to succeed
itself, the successor Operator shall be selected by the affirmative vote of two
(2) or more parties owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of the Operator that
was removed.

C.   Employees:

     The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees shall
be the employees of Operator.

D.   Drilling Contracts:

     All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor, shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by Operator
under the same terms and conditions as are customary and usual in the area in
contracts of in dependent contractors who are doing work of a similar nature.

                                                                               3
<PAGE>
                                   ARTICLE VI.
                            DRILLING AND DEVELOPMENT

A.  Initial Wells:

     On or before the _________ day of _________________________ 20_____,
Operator shall commence the drilling of the Wells ("Initial Test Wells") for oil
and gas at the following location:

   THERE SHALL NOT BE AN INITIAL TEST WELL BECAUSE OF THE EXISTING WELLS THAT
       WILL BE SUBJECT TO THIS OPERATING AGREEMENT AS OF THE TIME OF CLOSING THE
       ACQUISITION BY SKYLINE RESOURCES, INC., AND CEDAR RIDGE, LLC.

and shall thereafter continue the drilling of the well with due diligence to

unless granite or other practically impenetrable substance or condition in the
hole, which renders further drilling impractical, is en-countered at a lesser
depth, or unless all parties agree to complete or abandon the well at a lesser
depth.

     Operator shall make reasonable tests of all formations encountered during
drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application to
a specific formation or formations, in which event Operator shall be required to
test only the formation or formations to which this agreement may apply.

     If, in Operator's judgment, the well will not produce oil or gas in paying
quantities, and it wishes to plug and abandon the well as a dry hole, the
provisions of Article VI.E.1. shall thereafter apply.

B.   Subsequent Operations:

     1. Proposed Operations: Should any party hereto desire to drill any well to
be proposed at any one time on the Contract Area other than the well provided or
in Article VI.A., or to rework, deepen or plug back a dry hole drilled at the
joint expense of all parties or a well(s) jointly owned by all the parties and
not then producing in paying quantities, the party desiring to drill, rework,
deepen or plug back such a well(s) shall give the other parties written notice
of the proposed operation, specifying the work to be performed, the location,
proposed depth, objective formation and the estimated cost of the operation. The
parties receiving such a notice shall have thirty (30) days after receipt of the
notice within which to notify the party wishing to do the work whether they
elect to participate in the cost of the proposed operation. If a drilling rig is
on location, notice of a proposal to rework, plug back or drill deeper may be
given by telephone or facsimile and the response period shall be limited to
forty-eight (48) hours (inclusive of Saturdays, Sundays, and holidays). Failure
of a party receiving such notice to reply within the period above fixed shall
constitute an election by that party not to participate in the cost of the
proposed operation. Any notice or response given by telephone shall be promptly
confirmed in writing.

     If all parties elect to participate in such a proposed operation, Operator
shall, within ninety (90) days after expiration of the notice period of thirty
(30) days (or as promptly as possible after the expiration of the forty-eight
(48) hour period when a drilling rigs on location, as the case may be), actually
commence the proposed operation and complete it with due diligence at the risk
and expense of all parties hereto; provided, however, said commencement date may
be extended upon written notice of same by Operator to the other parties, for a
period of up to thirty (30) additional days if, in the sole opinion of Operator,
such additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance. Notwithstanding the force majeure provisions of
Article XI, if the actual operation has not been commenced within the time
provided (including any extension thereof as specifically permitted herein) and
if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance with the
provisions hereof as if no prior proposal had been made. Notwithstanding
anything to the contrary, should Operator fail to commence operations within the
allotted time, and there are no justifiable reasons for delay as outlined in
this Paragraph, any party may give notice of their intent to initiate the
operation, and within fifteen (15) days each party shall confirm their election
prior to the initiating party commencing the operations. The initiating party
shall have thirty (30) days from the end of the fifteen (15) day period to drill
the well on behalf of the Consenting Parties and the initiating party is
afforded the benefit of Article VI.B.

     2. Operations by Less than All Parties: If any party receiving such notice
as provided in Article VI.B.l. or VII.D.1. (Option No. 2) elects not to
participate in the proposed operation, then in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, within ninety (90)
days after the expiration of the notice period of thirty (30) days (or as
promptly as possible after the expiration of the forty-eight (48) hour period
(inclusive of Saturdays, Sundays, and holidays) when a drilling rig is on
location, as the case may be) actually commence the proposed operation and
complete it with due diligence. Operator shall perform all work for the account
of the Consenting Parties; provided, however, if no drilling rig or other
equipment is on location, and if Operator is a Non-Consenting Party, the
Consenting Parties shall either: (a) request Operator to perform the work
required by such proposed operation for the account of the Consenting Parties,
or (b) designate one (1) of the Consenting Parties as Operator to perform such
work. Consenting Parties, when conducting operations on the Contract Area
pursuant to this Article VI.B.2., shall comply with all terms and conditions of
this agreement.

     Nothwithstanding anything herein to the contrary, should any party hereto
propose to drill any subsequent well(s) in any regulatory quarter section, the
terms and conditions of the above paragraphs shall govern regarding it's
proposal. However if any party elects not to participate in the first well in a
quarter section, then in lieu of the rights afforded under Article VI.B.2, the
Non-Consenting parties shall be subject to the provisions of Article XV.

                                                                               4

<PAGE>

     If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period shall
advise the Consenting Parties of the total interest of the parties approving
such operation and its recommendation as to whether the Consenting Parties
should proceed with the operation as proposed. Each Consenting Party, within
forty-eight (48) hours after receipt of such notice, shall advise the proposing
party of its desire to (a) limit participation to such party's interest as shown
on Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties'
interest, and failure to advise the proposing party shall be deemed an election
under (a). In the event a drilling rig is on location, the time permitted for
such a response shall not exceed a total of forty-eight (48) hours (inclusive of
Saturday, Sunday and legal holidays). The proposing party at its election, may
withdraw such proposal if there is insufficient participation and shall promptly
notify all parties of such decision.

     The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, reworked, deepened or
plugged back under the provisions of this Article results in a producer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and equip
the well to produce at their sole cost and risk and the well shall then be
turned over to Operator and shall be operated by it at the expense and for the
account of the Consenting Parties. Upon commencement of operations for the
drilling, reworking, deepening or plugging back of any such well by Consenting
Parties in accordance with the provisions of this Article, each Non-Consenting
Party shall be deemed to have relinquished to Consenting Parties, and the
Consenting Parties shall own and be entitled to receive, in proportion to their
respective interests, all of such Non-Consenting Party's interest in the well
and share of production therefrom until the proceeds of the sale of such share,
calculated at the well, or market value thereof if such share is not sold.
(after deducting production taxes, excise taxes, royalty, overriding royalty and
other interests not excepted by Article III.D. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts) shall equal the total of the following:

     (a) 100% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including, but not
limited to, stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such Non
Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non- Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and

     (b) 450 % of that portion of the costs and expenses of drilling, reworking,
deepening, plugging back, testing and completing, after deducting any cash
contributions received under Article VIII.C., and 450% of that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.

     An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any reworking or plugging back
operation proposed in such a well, or portion thereof, to which the initial
Non-Consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
account. Any such reworking or plugging back operation conducted during the
recoupment period shall be deemed part of the cost of operation of said well and
there shall be added to the sums to be recouped by the Consenting Parties four
hundred fifty percent (450%) of that portion of the costs of the reworking or
plugging back operation which would have been chargeable to such Non-Consenting
Party had it participated therein. If such a reworking or plugging back
operation is proposed during such recoupment period, the provisions of this
Article VI.B. shall be applicable as between said Consenting Parties in said
well. See Article XV. for additional provisions regarding non-consent
operations.

     During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.

     In the case of any reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such equipment
shall remain unchanged; and upon abandonment of a well after such reworking,
plugging back or deeper drilling, the Consenting Parties shall account for all
such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.

     Within sixty (60) days after the completion of any operation under this
Article in which there are Non-Consenting Parties, the party conducting the
operations for the Consenting Parties shall furnish each Non-Consenting Party
with an inventory of the equipment in and connected to the well, and an itemized
statement of the cost of drilling, deepening, plugging back, testing,
completing, and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation.
may submit a detailed statement of monthly billings. Each month thereafter,
during the time the Consenting Parties are being reimbursed as provided above,
the party conducting the operations for the Consenting Parties shall furnish the
Non-Consenting Parties with an itemized statement of all costs and liabilities
incurred in the operation of the well, together with a statement of the quantity
of oil and gas produced from it and the amount of proceeds realized from the
sale of the well's working interest production during the preceding month. In
determining the quantity of oil and gas produced during any month. Consenting
Parties shall use industry accepted methods such as, but not limited to,
metering or periodic well tests. Any amount realized from the sale or other
disposition of equipment newly acquired in connection with any such operations
which would have been owned by a Non-Consenting Party had it participated
therein shall be credited against the total unreturned costs of the work done
and of the equipment purchased in determining when the interest of such
Non-Consenting Party shall revert to it as above provided; and if there is a
credit balance, it shall be paid to such Non-Consenting Party.

                                                                               5
<PAGE>

     If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it, and, from and
after such reversion, such Non-Consenting Party shall own the same interest in
such well, the material and equipment in or pertaining thereto, and the
production therefrom as such Non-Consenting Party would have been entitled to
had it participated in the drilling, reworking, deepening or plugging back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of the operation of said well in
accordance with the terms of this agreement and the Accounting Procedure
attached hereto.

     Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such source of supply.

     The provisions of this Article shall have no application whatsoever to the
drilling of the initial well described in Article VI.A. except (a) as to Article
VII.D.l. (Option No. 2), if selected, or (b) as to the reworking, deepening and
plugging back of such initial well after it has been drilled to the depth
specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if
initially completed for production, ceases to produce in paying quantities.

     3. Stand-By Time: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the results
thereof furnished to the parties, stand-by costs incurred pending response to a
party's notice proposing a reworking, deepening, plugging back or completing
operation in such a well shall be charged and borne as part of the drilling or
deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2, shall be charged to and borne as part of the proposed operation,
but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.

     4. Sidetracking: Except as hereinafter provided, those provisions of this
agreement applicable to a "deepening" operation shall also be applicable to any
proposal to directionally control and intentionally deviate a well from vertical
so as to change the bottom hole location (herein called "sidetracking"), unless
done to straighten the hole or to drill around junk in the hole or because of
other mechanical difficulties. Any party having the right to participate in a
proposed sidetracking operation that does not own an interest in the affected
well bore at the time of the notice shall, upon electing to participate, tender
to the well bore owners its proportionate share (equal to its interest in the
sidetracking operation) of the value of that portion of the existing well bore
to be utilized as follows:

     (a) If the proposal is for sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs incurred in the initial drilling of
the well down to the depth at which the sidetracking operation is initiated.

     (b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.

     In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be limited
to forty-eight (48) hours provided; however, any party may request and receive
up to eight (8) additional days after expiration of the forty-eight (48) hours
within which to respond by paying for all stand-by time incurred during such
extended response period. If more than one party elects to take such additional
time to respond to the notice, standby costs shall be allocated between the
parties taking additional time to respond on a day-to-day basis in the
proportion each electing party's interest as shown on Exhibit "A" bears to the
total interest as shown on Exhibit "A" of all the electing parties. In all other
instances the response period to a proposal for sidetracking shall be limited to
thirty (30) days.

C.   Taking Production In Kind:

     Each party shall have the right to take in kind or separately dispose of
its proportionate share of all oil and gas produced from the Contract Area,
exclusive of production which may be used in development and producing
operations and in preparing and treating oil and gas for marketing purposes and
production unavoidably lost. Any extra expenditure incurred in the taking in
kind or separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party taking its share of
production in kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities that it uses.

     Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.

     In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil and/or
gas produced from the Contract Area, Operator shall have the right, subject to
the revocation at will by the party owning it, but not the obligation, to
purchase such oil and/or gas or sell it to others at any time and from time to
time, for the account of the non-taking party at the same price obtained by
Operator for such production. Any such purchase or sale by Operator shall be
subject always to the right of the owner of the production to exercise at any
time its right to take in kind, or separately dispose of, its share of all oil
and/or gas not previously delivered to a purchaser. Any purchase or sale by
Operator of any other party's share of oil and/or gas shall be only for such
reasonable periods of time as are consistent with the minimum needs of the
industry under the particular circumstances, but in no event for a period in
excess of one (1) year.

     In the event one or more parties' separate disposition of its share of the
gas causes split-stream deliveries to separate pipelines and/or deliveries which
on a day-to-day basis for any reason are not exactly equal to a party's
respective proportionate share of total gas sales to be allocated to it, the
balancing or accounting between the respective accounts of the parties shall be
in accordance with any gas balancing agreement between the parties hereto,
whether such an agreement is attached as Exhibit "E", or is a separate
agreement.

D.   Access to Contract Area and Information:

     Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations, and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator shall furnish each of the other parties with copies of all forms or
reports filed with governmental agencies, daily drilling reports, well logs,
tank tables, daily gauge and run tickets and reports of stock on hand at the
first of each month, and shall make available samples of any cores or cuttings
taken from any well drilled on the Contract Area. The cost of gathering and
furnishing information to Non-Operator. other than that specified above, shall
be charged to the Non-Operator that re quests the information.

                                                                               6
<PAGE>

E.   Abandonment of Wells:

     1. Abandonment of Dry Holes: Except for any well drilled or deepened
pursuant to Article VI.B.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all Consenting Parties.
Should Operator, after diligent effort, be unable to contact any party, or
should any party fail to reply within forty-eight (48) hours (inclusive of
Saturdays, Sundays, and holidays) after receipt of notice of the proposal to
plug and abandon such well, such party shall be deemed to have consented to the
proposed abandonment. All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of the
parties who participated in the cost of drilling or deepening such well. Any
party who objects to plugging and abandoning such well shall have the right to
take over the well and conduct further operations in search of oil and/or gas
subject to the provisions of Article VI.B.

     2. Abandonment of Wells that have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If the well has been drilled or reworked pursuant to
Article VI.B.2. and the Consenting Parties therein have not been fully
reimbursed as therein provided, only the approval of such Consenting Parties
shall be required. If all parties consent to such abandonment, the well shall be
plugged and abandoned in accordance with applicable regulations and at the cost,
risk and expense of all the parties hereto. If, within thirty (30) days after
receipt of notice of the proposed abandonment of any well, all parties do not
agree to the abandonment of such well, those wishing to continue its operation
from the interval(s) of the formation(s) then open to production shall tender to
each of the other parties its proportionate share of the value of the well's
salvable material and equipment, determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. Provided, however, any party who receives notice of a
proposal to plug and abandon a well shall have the right within forty-eight (48)
hours after receipt of the notice to take over the well for additional testing
by any method at such party's sole cost and expense. Any party electing to take
a well over for additional testing subsequent to receipt of a notice to plug and
abandon such well shall be required to commence such additional testing within
thirty (30) days after their election to conduct the same. After such testing,
if the party elects to plug and abandon the well, the well shall be returned to
the Operator, but the testing party shall be responsible for any excess costs of
plugging and abandoning caused by such testing operations. Each abandoning party
shall assign the non-abandoning parties, without warranty, express or implied,
as to title or as to quantity, or fitness for use of the equipment and material,
all of its interest in the well and related equipment, together with its
interest in the leasehold estate as to, but only as to, the interval or
intervals of the formation or formations then open to production. If the
interest of the abandoning party is or includes an oil and gas interest, such
party shall execute and deliver to the non-abandoning party or parties an oil
and gas lease, limited to the interval or intervals of the formation or
formations then open to production, for a term of one (1) year and so long
thereafter as oil and/or gas is produced from the interval or intervals of the
formation or formations covered thereby, such lease to be on the form attached
as Exhibit "G".

     The assignments or leases so limited shall encompass the "wellbore" only of
the well being abandoned. The payments by, and the assignments or leases to, the
assignees shall be in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all assignees. There shall
be no readjustment of interests in the remaining portion of the Contract Area.

     Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
interval or intervals then open. Upon request, and at the Operator's election,
Operator shall continue to operate the assigned well for the account of the
non-abandoning parties at the rates and charges contemplated by this agreement,
plus any additional cost and charges which may arise as the result of the
separate ownership of the assigned well. Upon proposed abandonment of the
producing interval(s) assigned or leased, the assignor or lessor shall then have
the option to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to the
provisions hereof.

     3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.l.
or VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.

                                  ARTICLE VII.
                      EXPENDITURES AND LIABILITY OF PARTIES

A.   Liability of Parties:

     The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the parties
liable as partners.

                                                                              7
<PAGE>

                                   ARTICLE VII
                                    continued

B.   Liens and Payment Defaults:

     Each Non-Operator grants to Operator a lien upon its oil and gas rights in
the Contract Area, and a security interest in its share of oil and/or gas when
extracted, the proceeds from the sale of said oil and/or gas, and its interest
in all equipment, to secure payment of its share of expense, together with
interest thereon at the rate provided in Exhibit "C". To the extent that
Operator has a security interest under the Uniform Commercial Code of the state,
Operator shall be entitled to exercise the rights and remedies of a secured
party under the Code. The bringing of a suit and the obtaining of judgment by
Operator for the secured indebtedness shall not be deemed an election of
remedies or otherwise affect the lien rights or security interest as security
for the payment thereof. In addition, upon default by any Non-Operator in the
payment of its share of expense. Operator shall have the right, without
prejudice to other rights or remedies, to collect from the purchaser for the
proceeds from the sale purchaser the proceeds from the sale of such
Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each purchaser shall be entitled to
rely upon Operator's written statement concerning the amount of any default.
Operator grants a like lien and security interest to the Non-Operators to secure
payment of Operator's proportionate share of expense.

     If any party fails or is unable to pay its share of expense within sixty
(60) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator, pay
the unpaid amount in the proportion that the interest of each such party bears
to the interest of all such parties. Each party so paying its share of the
unpaid amount shall, to obtain reimbursement thereof, be subrogated to the
security rights described in the foregoing paragraph.

C.   Payments and Accounting:

     Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the joint
account hereunder showing expenses incurred and charges and credits made and
received.

     Operator, at its election, shall have the right from time to time to demand
and receive from the other parties payment in advance of their respective shares
of the estimated amount of expense to be incurred in operations hereunder during
the next succeeding month, which right may be exercised only by submission to
each such party of an itemized statement of such estimated expense, together
with an invoice for its share thereof. Each such statement and invoice for the
payment in advance of estimated expense shall be submitted on or before the 20th
day of the next preceding month. Each party shall pay to Operator its
proportionate share of such estimate within fifteen (15) days after such
estimate and invoice is received. If any party fails to pay its share of said
estimate within said time, the amount due shall bear interest as provided in
Exhibit "C" until paid. Proper adjustment shall be made monthly between advances
and actual expense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.

D.   Limitation of Expenditures:

     1. Drill or Deepen: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:

[]   Option No. 1:
------------------
     All necessary expenditures for the drilling or deepening, testing,
completing and equipping of the well, including necessary tankage and/or surface
facilities.

[X] Option No. 2:
-----------------
     All necessary expenditures for the drilling or deepening and testing of the
well. When such well has reached its authorized depth, and all tests have been
completed, and the results thereof furnished to the parties, Operator shall give
immediate notice to the Non-Operators who have the right to participate in the
completion costs. The parties receiving such notice shall have forty-eight (48)
hours (inclusive of Saturday, Sunday and legal holidays) in which to elect to
participate in the setting of casing and the completion attempt. Such election,
when made, shall include consent to all necessary expenditures for the
completing and equipping of such well, including necessary tankage and/or
surface facilities. Failure of any party receiving such notice to reply within
the period above fixed shall constitute an election by that party not to
participate in the cost of the completion attempt. If one or more, but less than
all of the parties, elect to set pipe and to attempt a completion, the
provisions of Article VI.B.2. hereof (the phrase "reworking, deepening or
plugging back" as contained in Article VI.B.2. shall be deemed to include
"completing") shall apply to the operations thereafter conducted by less than
all parties.

     2. Rework or Plug Back: Without the consent of all parties, no well shall
be reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the reworking or
plugging back of a wed shall include all necessary expenditures in conducting
such operations and completing and equipping of said well, including necessary
tankage and/or surface facilities.

     3. Other Operations: Without the consent of all parties, Operator shall not
undertake any single project reasonably estimated to require an expenditure in
excess of TWENTY THOUSAND Dollars (S 20,000.00 ) except in connection with a
well, the drilling, reworking, deepening, completing, recompleting, or plugging
back of which has been previously authorized by or pursuant to this agreement;
provided, however. that in case of explosion. fire, flood or other sudden
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion are required to deal with the
emergency to safeguard life and property but Operator, as promptly as possible,
shall report the emergency to the other parties. If Operator prepares an
authority for expenditure (AFE) for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of TWENTY THOUSAND Dollars ($ 20,000.00 ) but less than the
amount first set forth above in this paragraph.

                                                                               9
<PAGE>

                                   ARTICLE VII
                                    continued

E.   Rentals, Shut-in Well Payments and Minimum Royalties:

     Rentals, shut-in well payments and minimum royalties which may be required
under the terms of' any lease shall be paid by the party or parties who
subjected such lease to this agreement at its or their expense. In the event two
or more parties own and have contributed interests in the same lease to this
agreement, such parties may designate one of such parties to make said payments
for and on behalf of all such parties. Any party may request, and shall be
entitled to receive, proper evidence of all such payments. In the event of
failure to make proper payment of any rental, shut-in well payment or minimum
royalty through mistake or oversight where such payment is required to continue
the lease in force, any loss which results from such non-payment shall be borne
in accordance with the provisions of Article IV.B.2.

     Operator shall notify Non-Operator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing gas
well, at least five (5) days (excluding Saturday, Sunday and legal holidays), or
at the earliest opportunity permitted by circumstances, prior to taking such
action, but assumes no liability for failure to do so. In the event of failure
by Operator to so notify Non-Operator, the loss of any lease contributed hereto
by Non-Operator for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.

F.   Taxes:

     Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish 'Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
Non- Operator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such leasehold
estate, and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. If the ad valorem taxes are based in
whole or in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties hereto in accordance with the tax value
generated by each party's working interest. Operator shall bill the other
parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C".

     If Operator considers any tax assessment, improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protest assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C".

     Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.

G.    Insurance:

     At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations are
being conducted; provided, however, that Operator may be a self -insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C". Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit - D " attached to and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workmen's compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.

     In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.

                                  ARTICLE VIII.
                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.    Surrender of Leases:

     The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area. shall not be surrendered in whole or in part unless all
parties consent thereto.

     However, should any party desire to surrender its interest in any lease or
in any portion thereof, and the other parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of title, all of its interest in such lease, or portion thereof, and
any well, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an oil and gas interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such oil and gas
interest for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the land covered thereby. Upon such assignment or lease, the
assigning party shall be relieved from all obligations thereafter accruing, but
not theretofore accrued, with respect to the interest assigned or leased and the
operation of any well attributable thereto, and the assigning party shall have
no further interest in the assigned or leased premises and its equipment and
production other than the royalties retained in any lease made under the terms
of this Article. The party assignee or lessee shall pay to the party assignor or
lessor the reasonable salvage value of the latter's interest in any wells and
equipment attributable to the assigned or leased acreage. The value of all
material shall be determined in accordance with the provisions of Exhibit "C",

                                                                               9

<PAGE>

                                  ARTICLE VIII
                                    Continued

less the estimated cost of salvaging and the estimated cost of plugging and
abandoning. If the assignment or lease is in favor of more than one party, the
interest shall be shared by such parties in the proportions that the interest of
each bears to the total interest of all such parties.

     Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment. lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement.

B.   Renewal or Extension of Leases:

     If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of fifteen (15) days following receipt of such notice in
which to elect to participate in the ownership of the renewal lease, insofar as
such lease affects lands within the Contract Area. by paying to the party who
acquired it their several proper proportionate shares of the acquisition cost
allocated to that part of such lease within the Contract Area, which shall be in
proportion to the interests held at that time by the parties in the Contract
Area.

     If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease. Any renewal lease in which less than all
parties elect to participate shall not be subject to this agreement.

     Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.

     The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein. Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months after
the expiation of an existing lease shall not be deemed a renewal lease and shall
not be subject to the provisions of this agreement.

     The provision in this Article shall also be applicable to extensions and
top lease(s) of oil and gas leases.

C.    Acreage or Cash Contributions:

     While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
which the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions shall
also be applicable to optional rights to earn acreage outside the Contract Area
which are in support of a well drilled inside the Contract Area.

     If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D.    Maintenance of Uniform Interest:

     For the purpose of maintaining uniformity of ownership in the oil and gas
leasehold interests covered by this agreement, no party shall sell, encumber,
transfer or make other disposition of its interest in the leases embraced within
the Contract Area and in wells, equipment and production unless such disposition
covers either:

     1. the entire interest of the party in all leases and equipment and
production; or

     2. an equal undivided interest in all leases and equipment and production
in the Contract Area.

     Every sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties. No sale or assignment of interest
by any party will relieve or release such party of its obligations hereunder,
and such party shall be and remain liable for all obligations incurred by it
until all monies due and accounts payable attributable to its interest and
accruing out of the development and operation of the lease(s) subject hereto
during the period of its ownership of an interest herein, shall have been paid
in full by the party assigning its interest and the Operator has been furnished
with a certified copy of a recorded instrument evidencing the sale or
assignment.

     If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

                                                                              10
<PAGE>

                                  ARTICLE VIII
                                    Continued

E.   Waiver of Rights to Partition:

     If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.

F.   Preferential Right to Purchase:

         Should any party desire to sell all or any part of its interests under
this agreement, or its rights and interests in the Contract Area. it shall
promptly give written notice to the other parties, with full information
concerning its proposed sale, which shall include the name and address of the
prospective purchaser (who must be ready, willing and able to purchase), the
purchase price, and all other terms of the offer. The other parties shall then
have an optional prior right, for a period of ten (10) days after receipt of the
notice, to purchase on the same terms and conditions the interest which the
other party proposes to sell; and, if this optional Fight is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing parties.
However, there shall be no preferential right to purchase in those cases where
any party wishes to mortgage its interests, or to dispose of its interests by
merger, reorganization, consolidation, or sale of all or substantially all of
its assets to a subsidiary or parent company or to a subsidiary of a parent
company, or to any company in which any one party owns a majority of the stock.

                                   ARTICLE IX.
                         INTERNAL REVENUE CODE ELECTION

     This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter - K ", Chapter 1,
Subtitle " A ", of the Internal Revenue Code of 1954, as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Federal Regulations 1.761. Should
there be any requirement that each party hereby affected give further evidence
of this election, each such party shall execute such documents and furnish such
other evidence as may be required by the Federal Internal Revenue Service or as
may be necessary to evidence this election. No such party shall give any notices
or take any other action inconsistent with the election made hereby. If any
present or future income tax laws of the state or states in which the Contract
Area is located or any future income tax laws of the United States contain
provisions similar to those in Subchapter "K", Chapter 1. Subtitle "A", of the
Internal Revenue Code of 1954, under which an election similar to that provided
by Section 761 of the Code is permitted, each party hereby affected shall make
such election as may be permitted or required by such laws. In making the
foregoing election, each such party states that the income derived by such party
from operations hereunder can be adequately determined without the computation
of partnership taxable income.

                                   ARTICLE X.
                               CLAIMS AND LAWSUITS

     Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed TWENTY-FIVE
THOUSAND Dollars($ 25,000.00 ) and if the payment is in complete settlement of
such claim or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.

                                   ARTICLE XI.
                                  FORCE MAJEURE

     If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.

     The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts. or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.

     The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy, war,
Blockade, public riot, lightning, fire, storm, flood, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of equipment,
and any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the party claiming
suspension.

                                                                              11
<PAGE>

                                  ARTICLE XII.
                                     NOTICES

     All notices authorized or required between the parties and required by any
of the provisions of this agreement, unless otherwise specifically provided,
shall be given in writing by mail or telegram, postage or charges prepaid, or by
telex or telecopier and addressed to the parties to whom the notice is given at
the addresses listed on Exhibit "A". The originating notice given under any
provision hereof shall be deemed given only when received by the party to whom
such notice is directed, and the time for such party to give any notice in
response thereto shall run from the date the originating notice is received. The
second or any responsive notice shall be deemed given when deposited in the mail
or with the telegraph company, with postage or charges prepaid. or sent by telex
or telecopier. Each party shall have the right to change its address at any
time, and from time to time, by giving written notice hereof to all other
parties.

                                  ARTICLE XIII.
                                TERM OF AGREEMENT

     This agreement shall remain in full force and effect as to the oil and gas
leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.

     [X] Option No. 1:
     -----------------
     So long as any of the oil and gas leases subject to this agreement remain
or are continued in force as to any part of the Contract Area, whether by
production, extension, renewal or otherwise.

     [] Option No. 2:
     ----------------
     In the event the well described in Article VI.A., or any subsequent well
drilled under any provision of this agreement, results in production of oil
and/or gas in paying quantities, this agreement shall continue in force so long
as any such well or wells produce, or are capable of production, and for an
additional period of ______________ days from cessation of all production;
provided, however, if, prior to the expiration of such additional period, one or
more of the parties hereto are engaged in drilling, reworking, deepening,
plugging back, testing or attempting to complete a well or wells hereunder, this
agreement shall continue in force until such operations have been completed and
if production results therefrom, this agreement shall continue in force as
provided herein. In the event the well described in Article VI.A., or any
subsequent well drilled hereunder, results in a dry hole, and no other well is
producing, or capable of producing oil and/or gas from the Contract Area, this
agreement shall terminate unless drilling, deepening, plugging back or reworking
operations are commenced within _______________ days from the date of
abandonment of said well.

     It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached prior
to the date of such termination.

                                  ARTICLE XIV.
                      COMPLIANCE WITH LAWS AND REGULATIONS

A.   Laws, Regulations and Orders:

     This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, or finances, rules, regulations, and
orders.

B.   Governing Law:

     This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance. non -performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be governed
and determined by the law of the state in which the Contract Area is located.

C.   Regulatory Agencies:

     Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offset ting or adjacent to the Contract Area.

     With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or predecessor or successor agencies to the extent such
interpretation or application was made in good faith. Each Non-Operator further
agrees to reimburse Operator for any amounts applicable to such Non-Operator's
share of production that Operator may be required to refund. rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.

     Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold hereunder
or to any other person or entity pursuant to the requirements of the "Crude Oil
Windfall Profit Tax Act of 1980", as same may be amended from time to time
("Act"), and any valid regulations or rules which may be issued by the Treasury
Department from time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.

                                                                              12
<PAGE>

                                   ARTICLE XV.
                                OTHER PROVISIONS

The following terms, conditions and provisions are hereby added to this
Operating Agreement. In the event that some or all of the following terms and
conditions are in conflict with or create an ambiguity with the other terms and
conditions of this Operating Agreement, then the following terms and conditions
shall prevail and control. In the event that the terms and conditions of this
Operating Agreement are in conflict with or create an ambiguity with the terms
and conditions of that certain Participation Agreement dated February 28, 2003
between Cedar Ridge LLC ("CRLLC") and Skyline Resources, Inc., et al (the
"Participation Agreement") to which this Operating Agreement is attached, then
the terms and conditions of the Participation Agreement shall prevail and
control. The titles and headings used in this Article XV. are for the
convenience only, and they shall be disregarded for purposes of construing the
meaning of the provisions of this Article.

1.   STATUS OF OPERATOR: Non-Operators agree and understand that Operator is not
     selling or leasing any goods or services under the provisions of this
     Operating Agreement as contemplated by any deceptive trade practices acts
     of the States of Colorado or Wyoming and any provisions to the contrary
     herein notwithstanding, it is intended that the activities of Operator are
     considered as an accommodation to Non-Operator for which Operator is to be
     reimbursed on the basis and at the rates set forth herein.

2.   CONTROLLING OPERATING AGREEMENT: In the event any party hereto is a party
     to any other Joint Operating Agreement which covers any lands and/or depths
     that are covered by this Operating Agreement, it is agreed that as between
     the parties hereto that this Operating Agreement shall supersede, control
     and prevail over any prior Operating Agreement in so far as to the lands
     and depths constituting part of the Contract Area of this Operating
     Agreement.

3.   VALIDITY OF OPERATING AGREEMENT: Failure of any party to execute this
     Operating Agreement shall not render it ineffective as to any party hereto
     which does execute same. If counterparts of this Operating Agreement are
     executed, the signatures and acknowledgments of the parties, as affixed
     hereto, may be combined by Operator in, and treated and given effect for
     all purposes as, affixed thereto, may be ratified by separate instrument
     referring hereto, each of which shall have the effect of the original
     Operating Agreement and of adopting by reference all of the provisions
     herein contained.

4.   OPERATORSHIP: CRLLC is hereby granted the right to contract with third
     parties for all or any part of the services to be rendered by Operator
     under the terms of this Agreement. The contract for such services shall be
     subject to the terms of this Agreement, terminable at the will of Operator
     upon thirty (30) days or less notice, and shall not require the payment by
     Non-Operators of a sum in excess of the amount that would be payable to
     Operator under the terms of this Agreement for the services contemplated.
     Non-Operators agree that the liens granted to the Operator in this
     Operating Agreement shall inure to the benefit of the third party
     contracted with by Operator under this paragraph. If it has not already
     done so, prior to permitting any well, the actual Operator shall qualify
     with the States of Colorado or Wyoming as an operator, where the well is
     located.

5.   WHICH PARTIES HAVE CONSENT: Whenever the consent of all parties is required
     under the provisions of this Operating Agreement, it means the consent of
     all parties having a cost interest in the well involved at the time such
     consent is required or all parties who are participating in an operation
     which requires consent.

     A.   All "consents" communicated by a non-operating Drilling Party and/or
          Consenting Party are only deemed complete by the payment of legal
          tender, within ten (10) days of the communication of such consent, to
          the Operator of the full amount that the notice giving rise to such
          consent states such Drilling Party or Consenting Party is to pay, such
          amount being otherwise identified within the estimated cost or
          statement submitted by Operator by AFE or otherwise together with
          Operator's notice leading to the election to participate or not
          participate in the proposed operation; i.e., a party may not
          communicate to Operator its agreement to participate ("Consent")
          without tendering as provided herein its share of the estimated costs,
          as enumerated by Operator, for the activity for which such Consent is
          directed. The failure by a party to pay its share of such costs as
          provided herein, in legal tender, shall put such party in non-consent
          status and the same applicable non-consent provisions of the Operating
          Agreement shall apply, including without limitation to Article XV.17.
          Notwithstanding any other provisions of this Article XV.5. to the
          contrary, however, if a party ever communicates its consent to
          Operator, but fails to include the required payment, that party shall
          not be deemed to have withheld consent and shall not be subjected to
          the provisions of this operating agreement concerning non-consents
          unless (a) Operator makes written demand for the payment via certified
          mail and (b) the Non-Operator fails to make the payment within five
          (5) days thereafter.

     B.   The provisions of this Article XV.5.A. not withstanding, if at any
          time the commencement of a proposed operation for which a consenting
          party has tendered its payment, is delayed by a time period of more
          than 60 days, a consenting party may request that Operator return any
          portion of the prepayment amount not then expended. Any funds returned
          in this manner may be recalled by Operator with 48 hour notice to any
          such consenting party. Failure to return the funds to the Operator
          will constitute a non-consent of the proposed operation despite the
          earlier proper tender of funds as provided in Article XV.5.A.

6.   DEFINITIONS OF VARIOUS SUBSEQUENT OPERATIONS: "Reworked" or "reworking", as
     used in this Operating Agreement, shall include perforating, cleaning out,
     acidizing, fracturing, testing, completing (in the same horizon or in a
     deeper or shallower horizon), plugging back or any other operation for the
     purpose of maintaining, restoring or increasing production which does not
     involve the drilling of an additional hole.

7.   EXHIBIT "C" INTERPRETATION: The provisions of Exhibit "C" attached hereto
     shall be interpreted as recommended by the Council of Petroleum Accountants
     Societies of North America, Accounting Procedure for Joint Operations,
     1985, but giving effect to special changes and provisions noted in the
     provision of Exhibit "C", if any.

8.   PRIORITY OF OPERATIONS

     1.   If at any time there is more than one operation proposed in connection
          with any well subject to this Operating Agreement, then unless all
          participating parties agree on the sequence of such operations, such
          proposals shall be considered and disposed of in the following order
          of priority:

          (a)  Proposals to do additional testing, coring or logging; (b)
               Proposals to attempt to a completion in the objective zone; (c)
               Proposals to rework; (d) Proposals to plug back and attempt
               completions in shallower zones in ascending order; (e) Proposals
               to deepen the well, in descending order; (f ) Proposals to
               sidetrack the well; (g) Proposals to plug and abandon the well.

9.   FURTHER OPERATIONS: Notwithstanding anything elsewhere in this Operating
     Agreement to the contrary, if a proposal to conduct further open-hole
     logging, coring, and/or testing is the first operation which will be
     conducted, in accordance with the foregoing provisions of this Article,
     then a Non-Consenting Party to such logging, coring, or testing shall not
     have any rights to the data obtained by such operations and no Consenting

                                                                               9
<PAGE>

     Party shall provide such data to a Non-Consenting Party or any other third
     party not having an interest in the well without unanimous consent of the
     other Consenting Parties. No other Non-Consent Penalties shall be incurred
     as a result of an election not to participate in the proposed operation.
     Such further open-hole logging, coring, and/or testing shall be conducted
     at the sole cost and risk of the Consenting Parties to such operation.
     After such additional logging, coring, and/or testing has been completed,
     the Consenting Parties to such operation shall return the well in a stable
     condition for additional operations or plugging and abandoning to the
     parties who participated in the drilling of the well prior to such
     additional open-hole logging, coring, and/or testing.

10.  AREA OF MUTUAL INTEREST: It is agreed that the lands outlined on Exhibit
     "B" to the Participation Agreement above shall constitute an Area of Mutual
     Interest, hereinafter sometimes referred to as "AMI" between the parties
     hereto, which shall remain in force and effect for the life of this
     Operating Agreement; provided however, that: if any wells are drilled and
     completed under this Operating Agreement as producing wells within the AMI
     within two (2) years from the date hereof and this Operating Agreement
     remains in effect at the end of such two (2) year period, the AMI as herein
     established shall at the end of said two (2) year period and be reduced in
     size to include only lands covered by then unexpired leases jointly owned
     by all parties hereto and/or lands situated within the outer surface
     boundaries of the unit established (pursuant to rules and regulations of
     the regulatory body having jurisdiction in the area or pursuant to the
     leases included in such unit) around each such well that is producing at
     the end of such two (2) year period. As to lands referred to in the
     immediately preceding sentence for which this AMI continues in force, this
     AMI shall thereafter continue in force for a period ending six (6) months
     after the termination of the last such expiring leasehold interest. Each
     party hereto stipulates that it shall not be a party to any other area of
     mutual interest which is in conflict with the one established hereunder. It
     is understood and agreed that should a pre-existing AMI exist that predates
     in time the execution of this AMI that the parties hereto will act in good
     faith to resolve any conflicts, if necessary between the pre-existing AMI
     and this AMI. The provisions of this Article shall not be applicable when
     any party hereto acquires all or a part of the interest of another party
     hereto, or when additional leases covering lands within the Contract Area
     are acquired pursuant to Article VIII.B. hereof.

          In the event any of the parties hereto, hereinafter sometimes referred
     to as the "Acquiring Party", hereafter acquires, either directly or
     indirectly, a leasehold interest, mineral interest or other interest in the
     production of oil, gas or other minerals with regard to lands within the
     AMI, including lessor's royalty, (except such interest as may be acquired
     pursuant to Article VIII.B. hereof), said acquiring party shall give
     written notice of the acquisition to the other parties hereto within thirty
     (30) days after the acquisition of said interests. Said notice shall
     include copies of all instruments of conveyance, paid drafts or checks,
     itemized invoices of the actual costs incurred, and other available data
     concerning said acquisition and including burdens and obligations relating
     to such acquisition. Each of the other non-acquiring parties shall have the
     option to participate in said acquisition and to bear its share of all
     acquisition costs, burdens, obligations, conditions, covenants,
     requirements and terms relating to such acquisition, to the extent of its
     interest as set forth in Exhibit "A" attached hereto. Said option may only
     be exercised within thirty (30) days after the actual receipt of the
     written notice of acquisition, or within forty-eight (48) hours following
     receipt of said notice, exclusive of Saturday, Sunday and legal holidays,
     in the event a rig is on location within the AMI and the written notice so
     specifies, whichever is applicable. In the event a party elects to exercise
     its option to participate in said acquisition, said party shall give
     written notice thereof to the Acquiring Party within the period of time
     specified hereinabove. Each party exercising its option to participate in
     said acquisition shall bear and assume its proportionate share of all
     acquisition costs, burdens, obligations, conditions, covenants,
     requirements and terms relating to such acquisition, to the extent of its
     interest as set forth in Exhibit "A" attached hereto. To the extent a lease
     covers acreage inside and outside the AMI, the portion situated outside the
     AMI shall be offered to the parties and this Operating Agreement shall be
     amended to include the acreage outside the AMI. The failure of any
     non-acquiring party to give written notice of its election to participate
     within one of the periods of time specified herein, whichever is
     applicable, shall be deemed to be an election not to participate in said
     acquisition. In the event fewer than all parties hereto elect to
     participate in any acquisition, each participating party's proportionate
     share of the acquisition shall be based on the ratio in which the interest
     of said participating party as set forth on Exhibit "A", relates to the
     interest of all parties participating in said acquisition. However, in such
     event, any party whose share of such acquisition is increased shall have
     the option to not participate in such acquisition or to participate for
     less than the full amount of its increased interest, and the remaining
     interest shall then be offered proportionately to the other participating
     parties. All acquisition costs, burdens, obligations, conditions,
     covenants, requirements and terms shall be assumed and borne by the
     acquiring parties in accordance with said ratio. Any acquisition in which
     fewer than all parties elect to participate shall not be subject to this
     Agreement; however, the participating parties shall be treated as if they
     have entered into an operating agreement covering said acquisition which
     shall be identical to this Operating Agreement in all respects, with the
     exception of the interests of the parties as set forth on Exhibit "A",
     attached hereto, which shall be modified to reflect the interests of the
     participating parties in the acquisition.

          Each party electing to participate in such acquisition shall pay its
     proportionate share of the acquisition costs to the Acquiring Party, as
     determined hereinabove, within thirty (30) days after receipt of an invoice
     therefor. The failure of any party to tender its share of acquisition costs
     within said thirty (30) days shall result in an automatic forfeiture of
     said party's rights to said acquisition and assignment, and shall be deemed
     to be an election by said party not to participate in said acquisition.

          Notwithstanding anything herein to the contrary, the provision set
     forth in this Article XV, entitled "Area of Mutual Interest", shall not
     apply to any acquisitions which result from acts of merger, consolidation,
     reorganization by or between a parent company, subsidiary or affiliated
     corporation or the acquisition by one party hereto of the interest of
     another party hereto.

11.  EXCESS EXPENDITURES:

          In the event that Operator determines that in the drilling of any
     subsequent well, the costs of reaching the total depth proposed under the
     applicable AFE will exceed 125% of the original AFE estimate for the
     drilling of that well, then Operator shall notify Non-operators of the cost
     overrun, and obtain approval of a Supplemental AFE that provides an updated
     estimate of the revised total costs to drill the well. This provision is
     not to be interpreted to require Operator to scrutinize the drilling costs
     on a daily basis, but generally to provide Non-operators with notice that
     the costs of reaching the proposed total depth are more extensive than
     originally anticipated. Any supplemental AFE shall be consented to within
     forty eight (48) hours and be subject to the terms and conditions set forth
     in Article VI.B.2. or Article V. of this Joint Operating Agreement. If a
     party fails to timely approve the supplemental AFE, it shall be deemed to
     have elected not to participate further in the operation and the respective
     provision of Articles VI.B, VI.E, VII, and XV or otherwise of this
     Operating Agreement regarding operations by less than all parties
     (including, but not limited to, penalties to be incurred by Non-Consenting
     Parties) shall apply to the operation covered by the supplemental AFE and
     any further purposed operation with respect to the affected well.

          Emergency Operations. The provisions of the foregoing paragraph
     concerning the exceeding of an authorized AFE shall have no application in
     case of an emergency. An emergency shall be deemed to exist in case of
     flood, tools or other materials stuck or lost in the wellbore, loss of
     circulation, "kicks" (unexpected pressure surges in a wellbore), explosion
     blowout, cratering, fire, or other sudden emergency endangering life or
     property. In case of emergency, the Operator may, without submitting an
     AFE, take such steps and incur such expenses, as in its opinion, are
     reasonably necessary and appropriate to deal with the emergency in order to
     (i) safeguard life, property, or both or (ii) comply with governmental
     laws, rules, and regulations. In case of an emergency, Operator shall as
     promptly as possible notify the other parties of the occurrence of such
     emergency and the expenses which Operator is incurring with respect to the
     emergency. Within thirty (30) days after the cessation of the emergency
     condition, Operator shall furnish an AFE covering the costs incurred in
     dealing with the emergency. The cost reasonably incurred by Operator in
     dealing with an emergency shall be borne by the parties who participated in
     the operation in which the emergency arose in the proportion that each such
     party was bearing costs of such operation. In the case no operation was
     then being undertaken, such costs shall be borne by the parties owning an
     interest in the wellbore, facility, or equipment in which the emergency
     arose in the proportion of each such party's ownership interest in such
     well, facility, or equipment. A party who is liable hereunder for the costs
     of dealing with an emergency shall have no right to elect not to
     participate in (i) the undertaking of steps reasonably designed to deal
     with the emergency or (ii) the expenses and liabilities incurred by such
     undertaking. If the provisions of this paragraph conflict with those of
     Article VII concerning emergencies, the provisions of this paragraph shall
     prevail.

                                                                              14
<PAGE>

12.  OBLIGATORY WELL(S):

          Notwithstanding anything contained in this Operating Agreement to the
     contrary, if, during the term of this Operating Agreement, a proposal is
     made for the drilling, deepening, reworking, plugging back, sidetracking or
     recompleting of a well or wells or any other operation proposed or required
     within nine (9) months of the expiration of any right and/or interests
     subject to this Operating Agreement in order to (1) continue a lease or
     leases in force and effect, or (2) maintain a unitized area or any portion
     thereof in force and effect, or (3) earn an interest in and to oil and/or
     gas and other minerals which may be owned by any third party or preserve
     any rights to such interest which, failing such operations, would revert to
     a third party, or (4) comply with an order issued by a regulatory body
     having jurisdiction over the premises, failing which certain rights would
     terminate within such period (hereinafter referred to as "Obligatory
     Operation"), the following shall apply:

          Should less than all the parties hereto elect to participate and pay
     their proportionate part of the costs to be incurred in such Obligatory
     Operation as elsewhere herein provided, any party(s) desiring to
     participate shall have the right to do so in the manner provided elsewhere
     herein, at their sole cost, risk and expense.

          Promptly following the conclusion of an Obligatory Operation, each
     party not participating in said Obligatory Operation shall deliver to the
     party or parties participating in said Obligatory Operation an assignment
     of all of the right, title and interest of said non-participating party in
     that portion of the leases and/or other rights and interest which are
     maintained, perpetuated or earned as a result of said Obligatory Operation.
     The right, title and interest assigned and conveyed shall be shared by the
     participating parties in the proportion that the interest of each bears to
     the total interest of all of the participating parties. Such assignment
     shall be executed and delivered within thirty (30) days of the conclusion
     of such Obligatory Operation by each party not electing to participate and
     shall be in a form acceptable to the participating party or parties, free
     and clear of any overriding royalty interest, production payments,
     mortgages, liens or other encumbrances placed thereupon or arising out of
     the assigning party's ownership and operations subsequent to the date of
     this Operating Agreement, with the exception of the lessors royalties
     and/or arising under the leases listed on Exhibit "A', but otherwise
     without warranty of title, either express or implied. The leases, rights
     and interests in which an interest is assigned pursuant to the terms hereof
     shall no longer be subject to this Operating Agreement, but said leases,
     rights and interests shall be solely subject to a separate operating
     agreement which accurately reflects the interests of the party or parties
     in the Obligatory Operation, and which is otherwise identical to this
     Operating Agreement. It is agreed that the written notice and/or AFE's
     covering Obligatory Operations to be sent to the parties for their election
     to participate therein as provided in Article VI.B.1. will be clearly
     marked or identified as a proposal for an Obligatory Operation as herein
     defined.

13.  FILINGS BY OPERATOR: To the extent permitted by law, all of the parties to
     this Operating Agreement hereby designate Operator to be their agent and
     attorney-in-fact in connection with all filings and applications, reports,
     etc., required by each and every Federal and State regulatory body,
     commission or agency having regulatory jurisdiction over the oil and/or gas
     produced from the properties covered by this Operating Agreement,
     including, but not limited to, any filings with F.E.R.C. or other Federal,
     State or local governmental bodies which may be required under the terms of
     the Natural Gas Policy Act and other energy legislation or the regulations
     which may have been issued by any such governmental body pursuant thereto;
     provided, however, that all parties to this Operating Agreement agree to
     indemnify and hold harmless Operator from any loss risk, cost and expense
     resulting from Operator's making such filings in their behalf and each
     party agrees to bear and be responsible for his share of any refund
     obligation which may become due in the event any such governmental body
     should determine that prices received in the sale of oil or gas exceed the
     maximum price permitted by law. Nothing contained in this Operating
     Agreement shall be construed to create any fiduciary relationship between
     Operator and Non-Operator. Any party may participate in any such proceeding
     on its own behalf and at its own cost.

14.   PAYMENT OBLIGATIONS:

     A.  In relation to the provisions of Article VII.E., "Rentals, Shut-in Well
         Payments and Minimum Royalties", it is further provided that in the
         event a well capable of producing gas in paying quantities is to be
         shut in on the Contract Area, Operator shall immediately notify
         Non-Operator thereof, except Operator shall not be required to notify
         Non-Operator if the well should be shut in for limited periods of time
         in order to balance production during peak load periods or for reasons
         of making mechanical repairs; it being specifically provided that
         Operator shall not be liable for failure except through willful
         misconduct or gross negligence of Operator, to so notify Non-Operator.

         Should Operator, at any time, not desire to pay rentals or shut-in
         payments under any lease, as they fall due, it shall notify, in
         writing, the Non-Operators, at least (30) days in advance of the date
         when such payments accrue, of such desire; and, Operator shall not be
         required to pay such rentals or shut-in payments unless at least twenty
         (20) days before the rental or shut-in payment date a Non-Operator
         should request Operator, in writing, to pay the rentals or shut-in
         payments for its account. If such request is received by Operator
         within the time specified, Operator shall thereupon use its best
         efforts to make any such payments and shall bill such Non-Operator for
         such payments. Such bill for any such payments shall be promptly paid
         to Operator. Operator and each Non-Operator not timely requesting
         payment of such rentals or shut-in payments shall thereafter assign
         their interests in said lease to the Non-Operators paying said rentals
         or shut-in payments free and clear of all burdens on production except
         Lessor's royalties, and such other burdens (i) in existence on the date
         hereof and (ii) described in Article VIII.D. hereof; and such lease
         shall no longer be affected by the terms and provisions of this
         contract.

     B.  In relation to delay rentals, Operator shall submit to the parties
         reports of the monthly delay rental payments that will be due and
         payable on leases subject hereto at least 60 days in advance of such
         payments being due, together with the due dates for such payments,
         Operator's recommendations for the payment or non-payment thereof and a
         general description of the lands covered by same. A party may elect to
         terminate its interest in a lease or leases by providing written notice
         to Operator and all other parties hereto then owning an interest in
         said lease or leases, to the effect that the notifying party will not
         participate in the next ensuing delay rental payment with respect to
         such lease or leases at least 40 days in advance of such payments being
         due. Failure to notify Operator and such other parties of a party's
         election at least 40 days in advance of the rental payment due date
         shall be deemed an election to participate in payment of rentals. If at
         any time a party elects not to participate in payment of a delay
         rental, then the parties electing to participate in the payment shall
         have the right to assume their respective proportionate shares of the
         interest in the affected lease of the party electing not to participate
         by providing written notice to the other participating parties and
         Operator within 10 days after receipt of the notice of a party's
         election not to participate. Failure to provide such notice shall be
         deemed an election not to assume an interest. In the event that after
         such elections an interest in the affected lease remains that has not
         been assumed, Operator within 48 hours shall notify the participating
         parties, who may elect to assume their respective proportionate shares
         of such remaining interest by providing written notice within 48 hours
         after receipt of notice of the interest that is available; failure to
         provide such notice shall be deemed an election not to assume an
         additional interest. It after all such elections, an interest remains
         that has not been assumed by a party, then, at Operators sole
         discretion, the Operator may elect either to assume the remaining
         interest and make the delay rental payment or elect not to make the
         rental payment and allow the affected lease or leases to lapse.

         A party electing to terminate its interest in a lease or leases shall
         assign its interest therein to the participating parties free of any
         overriding royalty interests, net profits interests or other burdens or
         encumbrances other than the lessors royalties and any burdens listed on
         Exhibit "A" hereof. Any such lease or leases shall be removed from the
         terms of this Operating Agreement but shall be subject to the terms of
         an identical operating agreement between the participating parties with
         only the interests of the parties changed on Exhibit "A".

15.  BILLING FOR PREPARATION OF FILINGS:

     A.  Operator shall be entitled to make a direct charge against the Joint
         Account for: (a) Fees for legal services, costs and expenses in
         connection with preparation and presentation of evidence and exhibits
         for either the Colorado Oil & Gas Conservation Commission, or the
         Wyoming Oil & Gas Conservation Commission filings, other than ordinary
         filings necessary to operate wells; preparation and handling of
         applications to and hearings before the Federal Energy Regulatory
         Commission and other governmental agencies or regulatory bodies; and
         (b) actual costs, expenses, and salaries or wages incurred in
         connection with the preparation of all associated curative work.

                                                                              15
<PAGE>

     B.  It is contemplated that Operator may from time to time employ temporary
         employees and/or consultants to accomplish operations agreed to or
         which may hereafter be agreed to under the terms of this agreement
         specifically related to the leases covered hereby; and notwithstanding
         anything to the contrary in this agreement or any exhibit hereto,
         reasonable charges for the following items shall not be considered
         within the category of administrative overhead and shall be borne by
         the joint account:

         All outside fees for land, legal, geological, geophysical, engineering,
         drafting and reproduction services and all costs and expenses as
         incurred in connection with the maintenance of the leasehold,
         preparation and presentation of evidence and exhibits and handling of
         applications to and hearing before any and all governmental agencies or
         regulatory bodies. The effect of this provision shall not be to allow
         for billing of costs related to the conduct of internal routine monthly
         responsibilities of the operator, including regulatory Administration,
         Joint Interest Billing and Revenue Accounting.

16.  OVERPAYMENTS: Should it ever be determined by any governmental authority or
     any Court of final jurisdiction, that Operator or any other party is
     required to make any refund on oil, gas, or other minerals produced or sold
     from the Contract Area, then each Party hereto shall bear its proportionate
     part of the cost of any such refund to the extent that (a) runs paid from
     production to said Party and (b) Lessor's royalties and overriding
     royalties paid on leases included in the Contract Area attributable to
     proceeds paid to such Party exceed the permitted price, plus any interest
     thereon ordered by the regulatory authority or Court, or agreed to by
     Operator; and Non-Operators shall hold Operator harmless from such
     overpayment. If Operator advances funds to satisfy any of the
     Non-Operators' proportionate part of such contribution, and with the right
     to apply runs from production accruing from the Contract Area toward
     satisfying any refund obligation. Operator may also elect to pursue his
     remedies granted under Article VII.B and/or any other remedy allowed herein
     or at law or in equity.

17.  PREBILLING:

     A.   Notwithstanding anything to the contrary contained in this Agreement
          and in addition to any other right of Operator under this Agreement,
          Operator shall have the right to request and receive from Non-Operator
          payment in advance of its respective share of the cost of any
          drilling, completion, equipping, reworking, recompletion,
          sidetracking, deepening or plugging back operation, or acquisition of
          leases, 2-D and 3-D seismic operation, or other seismic costs, or any
          other costs incurred under this Agreement to which Non-Operator has
          consented pursuant to this Agreement (any such operation being herein
          called an "Operation"). Such prepayment request shall accompany the
          AFE, and/or letter detailing the Operation, shall specify the amount
          to be prepaid and the estimated commencement date of the Operation.
          The provisions of Article XV.5. shall apply to the timing of written
          demand, receipt and refund of prepayments under this Article XV.17
          unless a drilling rig is on location.

     B.   The prepayment must be received by Operator within ten (10) days of
          the receipt of such request, or 48 hours after the receipt of such
          request in the event a drilling rig is on location, if said Operation
          has previously been commenced. Non-Operator shall pay Operator in cash
          the full amount of such request or tender to Operator (at Operator's
          option and approval ONLY) an irrevocable bank letter of credit (which
          shall permit partial draws) or other cash equivalent security
          satisfactory to Operator for the full amount due. In the event payment
          is in cash, Operator shall credit the amount to Non-Operator's account
          for the payment of its share of costs of such Operation, and following
          the end of each month, Operator shall charge such account with
          Non-Operator's share of actual costs incurred during such month.

     C.   Payment of an advance shall in no event relieve Non-Operator of its
          obligation to pay its share of the actual cost of an Operation as
          provided for herein, and when the actual costs have been determined,
          Operator shall adjust the accounts of the Parties by refunding any net
          amounts due or involving Non-Operator for additional sums owing, which
          additional sums shall be paid in accordance with the Accounting
          Procedure-Joint Operations attached hereto.

     D.   If Non-Operator fails to pay or furnish the aforesaid security within
          the time period set forth above, then at Operator's option,
          Non-Operator may be deemed Non-Consenting Party in such Operation and
          be subject to the appropriate non-consent penalties and/or forfeiture
          provisions of this Agreement.

18.  TUBULAR GOODS: Non-Operator may furnish its share of all tubular goods in
     kind by notifying Operator within thirty (30) days of receipt of Operator's
     AFE that it will furnish its share of the tubular goods in kind. The
     tubular goods furnished in kind by Non-Operator shall be of the same
     quality, grade and weight as those provided by the Operator and shall be
     inspected, at Non-Operator's cost, to the same specifications utilized by
     the Operator. If the Non-Operator elects to have the Operator furnish its
     share of the tubular goods, then the same shall be furnished at Operator's
     cost, including actual shipping and preparation charges. Failure by
     Non-Operator to notify Operator within thirty (30) days of his receipt of
     an AFE that it wishes to furnish its tubular goods in kind shall be
     considered election by Non-Operator not to furnish its share of the tubular
     goods in kind.

19.  AD VALOREM TAXES: If the Operator is required hereunder to pay ad valorem
     taxes based in whole or in part upon separate valuations of each party's
     working interest, then notwithstanding anything to the contrary herein,
     charges to the Joint Account shall be made and paid by the parties hereto
     in accordance with the tax value generated by each party's working
     interest.

20.  DEFAULTS AND REMEDIES: Subject to Paragraph D. below, if any party
     (including the Operator) fails to pay its share of any cost, including any
     advance which it is obligated to make under any provision of this
     agreement, within the period required for such payment hereunder, then in
     addition to the remedies provided in Article VII.B., the Operator (or any
     Non-Operator if the Operator is the party in default) may pursue any of the
     following remedies:

     A.   Suspension of Rights: Operator (or the Non-Operators, if Operator is
          the party in default) may deliver to the party in default, by
          certified mail return receipt requested, a written Notice of Default,
          which shall specify the default, specify the action to be taken to
          cure the default, and specify that failure to take such action will
          result in the exercise of one or more of the remedies provided in this
          Article. If the default is not cured within fifteen days of the
          delivery of such Notice of Default, Operator (or the Non-Operator if
          Operator is the party in default) may suspend any or all of the rights
          of the defaulting party granted by this agreement until the default is
          cured, without prejudice to the right of the non-defaulting party to
          continue to enforce the obligations of the defaulting party
          theretofore accrued or thereafter accruing under this agreement. If
          Operator is the party in default, the Non-Operators shall, in
          addition, have the right, by vote of Non-Operators owning a majority
          in interest in the Contract Area after excluding the voting interest
          of Operator, to appoint a new Operator effective immediately. The
          rights of a defaulting party that may be suspended hereunder at the
          election of the non-defaulting parties include, without limitation,
          the right to receive information as to any operation conducted
          hereunder during the period of such default, and the right to elect to
          participate in an operation proposed under Article VI.B.I. of this
          agreement after the Notice of Default has been delivered to the
          defaulting party.

     B.   Deemed Non-consent: Operator (or any Non-Operator if the Operator is
          the party in default) may deliver, by certified mail return receipt
          requested, a written Notice of Non-consent Election to the defaulting
          party at any time after the expiration of the fifteen day cure period
          following delivery of the Notice of Default, in which event if the
          billing is for the drilling of a new well or the plugging back,
          sidetracking, reworking, or deepening of a well which is to be or has
          been plugged as a dry hole, or for the completion or recompletion of
          any well, the nonpaying party will be conclusively deemed to have
          elected not to participate in the operation and to be a Non-Consenting
          Party with respect thereto under Article VI.B. or VII.D. to the extent
          of the costs unpaid by such party, notwithstanding any election to
          participate theretofore made.

                                                                              16
<PAGE>

          Until the delivery of such Notice of Non-consent Election to the
          non-paying party and commencement of the operations, such party shall
          have the right to cure its default by paying the unpaid billing plus
          interest at the rate set forth in Section 1(3) of the attached COPAS
          1985 Onshore Accounting Procedures plus any costs or damages incurred
          by the non-consenting parties as a result of the default. Any interest
          relinquished pursuant to this Article XV.20.C. shall be offered by
          Operator (or by the Non-Operators if Operator is the defaulting party)
          to the non-defaulting parties in proportion to their interests, and
          the non-defaulting parties electing to participate in the ownership of
          such interest shall be liable to contribute their shares of the
          defaulted amount.

     C.   Good Faith Disputes: Notwithstanding the other provision of this
          Section 20. (and Section 17.C. above) in the event a party disputes in
          good faith the existence of a default on his part that is the subject
          of a Notice of Default (a "Disputing Party"), such party may avoid the
          imposition of the remedies for such default contained in this
          agreement if it (i) notifies Operator of the amount disputed and its
          reasons for disputing in good faith the amount due, and (ii) pays all
          undisputed amounts to the Operator.

     D.   Collection of Payments: Operator may institute appropriate legal
          action to collect all sums owed by Non-Operator hereunder, plus
          interest at JP Morgan Chase prime rate plus 3% not to exceed 12% from
          the date such costs or expenses were payable to the Operator pursuant
          hereto until paid, and any and all expenses incurred in connection
          with such legal action, including reasonable attorneys fees. In the
          event the option provided in this Subparagraph 1. is exercised,
          Non-Operator shall be entitled to retain its interest in the
          properties covered hereby; provided, however, that in the event
          Non-Operator does not pay the amount recovered by Operator under any
          final judgment within thirty (30) days after such judgment becomes
          final, then and in such event Operator shall be entitled to proceed
          against Non-Operator's interest in the properties covered hereby at
          Operator's option by means of any remedy provided by law for the
          execution of judgments or by appropriate proceedings to foreclose the
          lien and security interest on such interest provided in Subparagraph
          2. hereof.

          Operator shall have, and is hereby granted, a lien upon the interest
          of Non-Operator in the properties covered hereby and a security
          interest in the Collateral (as hereinafter defined) in order to secure
          payment by Non-Operator of its obligations hereunder, which lien and
          security interest shall be prior and superior to any lien or security
          interest that may hereafter be created upon such interest. Upon the
          failure of Non-Operator to timely pay its share of costs and expenses
          hereunder when due and owing as prescribed herein, then and in such
          event the lien and security interest referred to above in this
          Subparagraph 2, and the obligations secured thereby may be enforced
          forthwith either through judicial proceedings or by the sale by
          Operator of Non-Operator's interest (i) in the lands and leases
          covered hereby and (ii) the Collateral, or any or all, which sale may
          be made in one or more sales, either at public sale, with notice to
          Non-Operator, for such price and on such terms as Operator in its sole
          discretion exercised in good faith may determine, or by public sale in
          such manner as may be prescribed by law for the state where such
          property is located for the enforcement, foreclosure or conduct of
          sales under powers of sale contained in mortgages or deeds of trust,
          or for enforcement of security interests under the UCC (as hereinafter
          defined), all as Operator may elect; and Operator shall have the right
          to determine in its sole discretion whether or not to require as a
          condition of any such sale (whether made by virtue of judicial
          proceedings or under the power of sale or UCC remedies hereby given to
          Operator) that the purchaser assume Non-Operator's obligations
          hereunder. The proceeds of any such sale or sales and all other monies
          received by Operator in any proceedings or actions for the enforcement
          of such lien and the obligations secured thereby (including any sales
          pursuant to a judgment obtained pursuant to Sub paragraph 1. above)
          shall be applied as follows:

               First: To the payment of all necessary costs and expenses
               incident to such sale or sales and the enforcement of such lien
               and security interest and the obligations secured thereby,
               including, but not limited to, reasonable attorney's fees;

               Second: To the payment of the amount in default; and,

               Third: The remainder, if any, shall be paid to Non-Operator or to
               any party (including such purchaser) who may be lawfully entitled
               to receive the same.

          The recitals contained in any assignment evidencing a foreclosure sale
          or sale pursuant to foreclosure under applicable law or for
          enforcement of security interests under the UCC by Operator under the
          provisions hereinabove conferred shall be full proof of the matters
          therein stated, and no other proof shall be requisite of the necessity
          for, or propriety of, such sale shall or any fact, condition or thing
          incident thereto; and all prerequisites of such sale shall be
          conclusively presumed to have been performed. Operator shall have the
          right to become the purchaser at any foreclosure sale held by Operator
          pursuant to the power hereinabove conferred or by any receiver or
          public officers.

          As used herein, "Collateral" means the interest of Non-Operator in the
          properties covered hereby now owned or hereafter acquired insofar as
          such properties consist of accounts, general intangibles and
          instruments (as the latter three terms are defined in the Uniform
          Commercial Code, the "UCC", as codified in Colorado and Wyoming),
          whether directly or indirectly or by agreement or force of law are
          attributable to or connected with Non-Operator's business transactions
          relating to such properties, general intangibles, accounts and
          contract rights arising in connection with the sale or other
          disposition of Hydrocarbons or other minerals, instruments, inventory,
          equipment, Hydrocarbons, other minerals, fixtures located in, on or
          under the lands and leases covered hereby and any and all other
          personal property (at any time used on or in connection with the lands
          and leases covered hereby) of any kind or character defined in and
          subject to the provisions of the UCC, including the proceeds and
          products from any and all of such personal property and other
          property, rights and other items described in this sentence. It is
          understood that a portion of the properties herein described may be
          and the security interest and lien created in this Article XV.5. will
          attach to (i) fixtures on the lands and leases covered hereby and (ii)
          minerals or the like (including Hydrocarbons, oil and gas) produced or
          to be produced from the lands and leases covered hereby or the
          accounts subject the respective section of the UCC that addresses the
          UCC resulting from the sale therefrom and are financed at the wellhead
          or minehead of the wells or mines located on the lands and leases
          covered hereby. "Hydrocarbons" means oil, gas, casinghead gas, drip
          and natural gasoline, condensate and all other liquid or gaseous
          hydrocarbons. The name of the record owner of the Collateral is
          Non-Operator.

     E.   Costs and Attorney's Fees: In the event any party shall ever be
          required to bring legal proceedings in order to collect any sums due
          from any other party or any other legal proceeding to enforce any
          other right under this agreement, then the prevailing party in such
          action shall also be entitled to recover all court costs, costs of
          collection, and a reasonable attorney's fee, which the lien provided
          for herein shall also secure.

21.  MUTUALITY: The parties hereto acknowledge and declare that this Agreement
     is the result of extensive negotiations between themselves. Accordingly in
     the event of any ambiguity in this Agreement, there shall be no presumption
     that this instrument was prepared solely by either party hereto.

22.  RIGHT TO SET OFF; LIEN & SECURITY INTEREST:

     A.  As additional security for all sums owing or which become owing to
         Operator hereunder on account of any expense hereunder, each party
         grants to the other parties a security interest in and a contractual
         right to set off in and to all money, proceeds from sale of production
         and property of Non-Operator now or at any time hereunder coming within
         Operator's custody or control. Operator at any time and from time to
         time may, but is not obligated to, reduce (or eliminate as the case may
         be) any debt owing to it by an Non-Operator by applying such
         Non-Operator's money, proceeds or property in the custody or control of
         Operator to the balance owed on such debt and giving Non-Operator
         appropriate credit therefor. Any such amount so applied shall first be
         applied to outstanding interest, if any, and then to the underlying
         debt.

                                                                              17
<PAGE>

     B.  Subject to the provisions of Article VII.B, each Non-Operator grants to
         the Operator a lien upon all of the rights, titles and interests of
         such granting party, whether now existing or hereafter acquired, in and
         to (a) the oil, gas and other minerals in, on and under the Contract
         Area; (b) any oil, gas and mineral leases Covering the Contract Area or
         any portion thereof; and (c) any oil and gas interest within the
         Contract Area. In addition, each Non-Operator grants to the Operator a
         security interest in and to all of such granting party's rights,
         titles, interests, claims, general intangibles, proceeds and products
         thereof, whether now existing or hereafter acquired, in and to (a) all
         oil, gas and other minerals produced from the Contract Area when
         produced, (b) all accounts receivable accruing or arising as a result
         of the sale of such oil, gas and other minerals from the Contract Area,
         (c) all cash or other proceeds from the sale of such oil, gas and other
         minerals once produced, and (d) all oil or gas wells and other surface
         and subsurface equipment and facilities of any kind or character
         located in the Contract Area and the cash or other collateral is or
         will become fixtures on the Contract Area, and the interest of each
         party in and to the oil, gas and other minerals when extracted from the
         Contract Area and the accounts receivable accruing or arising as the
         result of the sale thereof shall be financed at the wellhead of the
         well or wells located on the Contract Area.

     C.  Any breach by a Non-Operator of any requirement to pay its share of
         expenses herein shall constitute an event of default. On the occurrence
         of an event of default, unless such statement or expenses are
         reasonably disputed and diligently pursued to resolution by the
         disputing party, Operator shall have available to it all of the rights
         and remedies available to a secured party, including, without
         limitation, the rights of judicial foreclosure under the lien laws of
         the relevant state provided, however, that the Operator gives such
         breaching Non-Operator not less than 30 days written notice of its
         intent to exercise such right.

     D.  Operator grants a like lien and security interest as set out in this
         Article XV.22. to each Non-Operator to secure payment of Operator's
         proportionate share of expense and the payment of any monies or funds
         due to such Non-Operator by Operator under the terms of this agreement,
         including without limitation, the proceeds from the sale of production
         from the Contract Area. Any breach by Operator of any requirement to
         pay its share of expenses herein or disburse the proceeds of production
         or other funds due a Non-Operator shall constitute an event of default.
         On the occurrence of an event of default, unless such matter is
         reasonably disputed and diligently pursued to resolution by the
         disputing party, the aggrieved Non-Operator shall have available to it
         all of the rights and remedies available to a secured party, including,
         without limitation, the rights of judicial foreclosure under the lien
         laws of the relevant state provided, however, that the Non-Operator
         gives Operator not less than 30 days written notice of its intent to
         exercise such right.

     E.  The parties hereto agree to execute the Model Form Recording Supplement
         to Operating Agreement and Financing Statement attached to this
         Operating Agreement as Exhibit "H" (the "Memorandum") for the purpose
         of giving record notice to third parties of the existence of this
         Operating Agreement and of the mortgage lien and security interest
         created by each party, as debtor, to all other parties, as secured
         parties. Such Memorandum may be recorded by Operator of any
         Non-Operator in any county in which the Contract Area is located and/or
         with the Secretary of State. The Parties agree to execute and return
         the memorandum within 15 days of receipt of the memorandum and the
         request by Operator or any non-Operator to execute the same. With
         respect to the security interest granted in this Article XV.22., this
         Operating Agreement (including a carbon, photographic or other
         reproduction hereof, or any extract herefrom), or any Model Form
         Recording Supplement to this Operating Agreement, shall constitute a
         non-standard form financing statement under the terms of the (Uniform
         Commercial Code of the state in which the Contract Area is located and,
         as such, may be filed for record in the records of any County in which
         the Contract Area is located and/or with the Secretary of State.

23.  LEGAL FEES FOR PAYMENT DELINQUENCY: Should any Non-Operator fail to timely
     pay its proportionate part of any amounts owed under this Operating
     Agreement, Operator's rights shall include the right to charge such
     Non-Operator for any legal expense and attorney's fees incurred in
     connection with collecting such amount. Similarly, if Operator fails to
     timely pay its proportionate part of any amounts owned under this Operating
     Agreement, Non-Operators shall have the right to charge Operator for any
     legal expense and attorney's fees incurred in connection with the
     collecting of such amount. It is further agreed that any suit brought
     against a Non-Operator shall be in the Court of competent jurisdiction in
     the County where the property from which the charge arose is located.

24.  SELLING PARTY LIABILITY: Notwithstanding anything to the contrary contained
     herein, in the event any party to this Operating Agreement sells, assigns,
     conveys or otherwise disposes of its interest herein to a third party or
     parties, the Operator, irrespective of such conveyance, shall look solely
     to the conveying party for performance of all its duties and obligations
     set forth in this Operating Agreement, including, but not limited to the
     performance by conveying party to account for and pay all gas
     overproduction as required by Article 13.2 of Exhibit "E", Gas Balancing
     Agreement, and any obligation to pay its share of expense of developing and
     operating the Contract Area within thirty (30) days after rendition of a
     statement therefor by Operator, until and unless Operator is furnished a
     recorded copy of legal instrument evidencing good and sufficient
     conveyance.

25.  Dilution of Interest: If any original signatory party sells any of its
     interest to more than four (4) entities, Operator will look to the original
     signatory party for all elections, and payment obligations, and all
     proceeds will be paid to original signatory party. In the event that an
     original signatory party's interest is ever transferred to more than four
     (4) entities, then the Operator shall look to the initial four (4)
     assignees of said interest for all elections, and payment obligations, and
     all proceeds will be paid to the initial four (4) assignees.

26.  SEPARATE MEASUREMENT OF PRODUCTION: If a diversity of the working interest
     ownership in production from a well or a lease subject to this Operating
     Agreement occurs as a result of operations by less than all parties
     pursuant to any provisions of this Operating Agreement, it is agreed that
     the oil and other liquid hydrocarbons produced from the well or wells
     completed by the consenting Party or Parties shall be separately measured
     by standard metering equipment to be properly tested periodically for
     accuracy, and the setting of a separate tank battery will not be required
     unless the purchaser of the production or governmental regulatory body
     having jurisdiction will not approve metering for separately measuring the
     production.

27.  SEPARATE MEASUREMENT FACILITIES: In the event of a transfer, sale,
     encumbrance or other disposition of interest within the Contract Area that
     necessitates the separate measurement of production, the party creating the
     necessity for such measurement shall alone bear the cost of purchase,
     installation and operation of such facilities.

28.  SUBSEQUENTLY CREATED BURDENS: If, subsequent to the date hereof, any party
     should create an overriding royalty, production payment or other burden
     against its working interest production (except any overriding royalty
     agreement disclosed in the Participation Agreement), no other Party's
     interest shall be burdened by such newly created interest, and furthermore,
     if such party should not participate in an operation under any provision
     hereof so that the participating parties become entitled to receive such
     Non-Consenting Party's proceeds from the sale of production from such well,
     the party creating such burden shall hold harmless the other parties hereto
     from and against any obligations created by such burden and if the party
     holding the newly created interest does not voluntarily acknowledge the
     fact that his interest terminates under the non-consent provisions hereof,
     the Non-Consenting Party shall pay all amounts due under such burden so
     that the participating parties receive an amount equal to all proceeds from
     the sale of production from such well subject only to reduction for
     production taxes, royalty, overriding royalty and other interests of record
     on the date hereof or disclosed in the Participation Agreement payable out
     of or measured by production from such well. A subsequently created
     interest shall terminate if the party creating the same elects or is deemed
     to have elected to not participate in a subsequent operation. Such
     subsequently created interest shall terminate effective upon same date as
     the effective date of the assignment from the non-consenting party to the
     consenting parties.

                                                                              18
<PAGE>

29.  BANKRUPTCY: If, following the granting of relief under the Bankruptcy Code
     to any party hereto as debtor thereunder, this agreement should be held to
     be an executory contract under the Bankruptcy Code, then any remaining
     party shall be entitled to a determination by debtor or any trustee for
     debtor within thirty (30) days from the date an order for relief is entered
     under the Bankruptcy Code as to the rejection or assumption of this
     agreement. If the debtor or any trustee determines to assume this
     agreement, the party seeking determination shall be entitled to adequate
     assurances as to the future performance of debtor's obligations hereunder
     and the protection of the interests of all parties. The debtor shall
     satisfy its obligation to provide adequate assurances by either advancing
     payments or depositing the debtor's proportionate share of expenses in
     escrow.

30.  DATA CONFIDENTIALITY: Any information, data, or other material provided to
     the parties hereto shall be held by each party in confidence for the term
     of this Agreement and, subject to the requirements of any governmental
     authority having jurisdiction, shall not be released to anyone who is not a
     party hereto without the consent of the parties hereto being first
     obtained. The foregoing confidentiality provisions shall not apply to (a)
     any requirements of an applicable Oil, Gas and Mineral lease which
     stipulates that the lessor thereunder is to be provided with data generated
     by operations on the lease, (b) information which is or becomes, through no
     fault of a party, part of the public knowledge, (c) information which is or
     becomes available to a party without obligation of confidence from sources
     having the legal right to disclose the information, the sources being other
     than a party hereto, or (d) information provided to third parties who agree
     in writing to observe the confidentiality provisions of this Operating
     Agreement if such third parties are (i) providing consulting or
     professional services with respect to the party's interest in the Contract
     Area, (ii) potential bona-fide lenders, who will be secured by the party's
     interest, or assignees of the party's interest, or (iii) potential
     bona-fide purchasers of production from the Contract Area or of a party's
     interest in the Contract Area.

31.  PRESS RELEASES: No party hereto shall, at any time, issue to the press or
     other media any news release or distribute any information or photographs,
     concerning the premises covered hereby, without the prior approval of all
     of the other parties hereto. When all of the parties have reviewed such
     material and all parties have approved the issuance of the material, the
     party desiring such release shall have the principal responsibility for its
     issuance. The only other exception to the foregoing shall be that in the
     event of an emergency involving extensive property damage, operations
     failure, loss of human life or other clear emergency, the party designated
     as Operator hereunder is authorized to furnish such minimum, strictly
     factual information as shall be necessary to satisfy the legitimate public
     interest on the part of the press and duly constituted authorities, if time
     does not permit the obtaining the prior approval by the other parties. Said
     Operator shall thereupon promptly advise the other parties of the
     information so furnished.

32.  CBM DEVELOPMENT: The parties recognize that drilling for Coalbed Methane
     Gas is a unique and separate endeavor from conventional drilling. Often it
     is more efficient to propose the drilling of CBM wells (and related
     dewatering and/or injection wells) in a series or grouping with the intent
     to complete drilling operations within one drilling phase, with such
     drilling phase being governed by weather patterns, drilling rig schedules
     or production area(s).

A CBM grouping proposal will be referred to as a "Development Area ("DA") and
numbered sequentially.

Any party may propose a DA. When a DA is proposed, the other parties must make
their election(s) regarding participation in the DA as it is proposed and in its
entirety. A party may not elect to participate in drilling some of the wells
within the proposed DA and not participate in the drilling of other wells.

     (A)  Notice of Proposed DA. Any party may propose a DA; however, a DA may
          not exceed twelve (12) wells. Notice of the proposed DA shall be
          treated as one proposed operation, and given in accordance with and
          subject to the terms of this JOA. AFE's for all the wells proposed
          under a DA shall be tendered at the time that the DA is proposed.

     (B)  Spacing. For the purposes of this Agreement, all well locations shall
          conform to a 160-acre spacing comprised of a governmental quarter
          section, regardless of the applicable State spacing regulations or a
          drilling pattern that has been approved by the applicable regulatory
          agency that has jurisdiction for such operations. Any non-consent
          election under a Notice of Proposed DA shall cause the non-consenting
          party (or parties) to be deemed a non-consenting party in any
          additional proposals within any and all of the quarter sections
          included within the DA until the non-consent penalty has been
          recouped. Any additional well(s) drilled or operation(s) conducted
          during the recoupment period shall be deemed part of the cost of
          drilling and/or operation of said well and there shall be added to the
          sums to be recouped by the Consenting Parties four hundred fifty
          percent (450%) of that portion of the costs of the drilling of the
          well(s) and/or operation(s) which would have been chargeable to such
          Non-Consenting Party had it participated in the original proposal.

     (C)  Election to Drill. If all parties elect to participate in the drilling
          of the DA, the Operator shall commence operations for the DA as
          promptly as reasonably possible after all necessary approvals have
          been obtained. Actual operations shall be commenced in conformance
          with Article VI.B. If less than all parties elect to participate in
          the DA, the non-participating party's (or parties') interest shall be
          handled in accordance with the terms of this JOA.

     (D)  CBM Operations by Less than All Parties: If less than all the parties
          elect to participate in a DA, then the provisions of this JOA shall
          determine how the non-participating party's (or parties') interest(s)
          are handled.

     (E)  Multiple DA's: Notwithstanding anything herein to the contrary (save
          and except Article XV.12. Obligatory Wells), the parties agree that,
          for a period of two (2) years from and after the date of this
          Agreement, without prior written consent of all the parties, no party
          shall be required to make an election whether or not to participate in
          a new DA while two or more: (i) Notices of DA Proposals are pending;
          or (ii) drilling programs are being conducted in approved DA's; or a
          combination of (i) and (ii). Provided, however, the foregoing shall
          not apply to any operation proposed to comply with the express or
          implied covenants of any lease or interest subject to this Agreement.

33.  NON-CONSENT PROVISION: In accordance with the terms and conditions required
     to propose a subsequent well(s) or operation(s) under Articles VI.B and
     XV.32, a proposing party shall be entitled to propose a CBM grouping of
     wells under a DA, a single well, or multiple wells. In the event that a DA
     group of wells is proposed and a party (or parties) elect not to
     participate in the drilling of that DA group of wells, then the DA group of
     wells shall be treated as one well, and the non-consent penalties set forth
     in Article VI.B shall be recouped from all of the wells as if the total
     amount expended for the DA group of wells was for one well. Additionally,
     if any additional well(s) or other operation(s) is/are drilled or conducted
     in any quarter section that contains a well drilled under a given proposal,
     then the non-consenting party (or parties) to the earlier drill or
     operation shall be deemed to have made a non-consent election for the
     additional well(s) or operation(s) within any and all of the quarter
     sections included within the DA or the quarter section in which a well is
     drilled until the non-consent penalty has been recouped, and the costs of
     that/those additional well(s) or any additional operation(s) conducted
     during the recoupment period shall be deemed part of the cost of drilling
     and/or operation(s) of said well and there shall be added to the sums to be
     recouped by the Consenting Parties four hundred fifty percent (450%) of
     that portion of the costs of the drilling or operation(s) which would have
     been chargeable to such Non-Consenting Party had it participated in the
     original proposal.

                                  ARTICLE XVI.
                                  MISCELLANEOUS

     This, agreement shall be binding upon and shall inure to the benefit of the
parties hereto and to their respective heirs, devisees, legal representatives,
successors and assigns.

     This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.

     IN WITNESS WHEREOF, this agreement shall be effective as of 28th day of
February 20 03 .

                                    OPERATOR

                                           CEDAR RIDGE, LLC

---------------------------                -------------------------------------
                                           Terry L. Logan, Manager

                                           NON-OPERATORS

SKYLINE RESOURCES, INC.                    SLATERDOME GAS, INC.

---------------------------                -------------------------------------
Name: Jubal S. Terry,                      Name:
      President/CEO

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

                                                                              20
<PAGE>
                   Fly Creek Prospect JOA Exhibit "A" - Page 1
                                   EXHIBIT "A"

Attached to and made a part of that certain  Operating  Agreement dated February
28, 2003 by and between  Cedar Ridge,  LLC , as Operator and Skyline  Resources,
Inc., and Slaterdome Gas, Inc., as Non-Operators.

1.   Lands subject to Operating Agreement

                             Carbon County, Wyoming

                        Township 13 North, Range 88 West
                      Sections 1 - 36 (The entire township)

                        Township 13 North, Range 89 West
                      Sections 1 - 36 (The entire township)

                        Township 13 North, Range 90 West
              Sections 1-3, 10-15, 22-27, and 34-36 (The E/2 of the
                                    township)

                        Township 12 North, Range 88 West
                        --------------------------------
                       Sections 1-24 (The entire township)

                        Township 12 North, Range 89 West
                        --------------------------------
                       Sections 1-20 (The entire township)

                        Township 12 North, Range 90 West
                 Sections 1-3, 10-15, and 22-24 (The E/2 of the
                                    township)

                             Moffat County, Colorado

                        Township 12 North, Range 89 West
                        --------------------------------
                       Sections 7-36 (The entire township)

2.   Restrictions, if any, as to depth or formations

     There are no restrictions as to depth or formations.

3.   Percentages or fractional interests of the parties to this Agreement

Cedar Ridge, LLC                    36.66667%
Skyline Resources, Inc.             30.00000%
Slaterdome Gas, Inc.                33.33333%

4.   Addresses of the parties to this Agreement
<TABLE>
<CAPTION>
<S>                              <C>                             <C>
Skyline Resources, Inc.          Cedar Ridge, LLC                Slaterdome Gas, Inc.
3000 Youngfield                  623 Garrison Ave., Suite 100    10225 Yonge Street
Suite 338                        PO Box 2359                     Richmond Hill, Ontario
Lakewood, CO  80215              Fort Smith, AR  77901           Canada L4C 3B2
Attn:  Mr. Jubal S. Terry        Attn:  Mr. William L. Dawkins   Attn:  Mr. Robert Salna
President/CEO                    General Counsel                 Tele No.: (905) 884-3988
Telephone No.: (303) 238-8712    Telephone No.: (479) 783-4191   Fax No.:  (905) 737-7516
Facsimile No.: (303) 238-3190    Facsimile No.: (479) 783-4195
</TABLE>

5. Oil and gas leases and/or oil and gas interests subject to this agreement;

      Refer to the attached Exhibit of oil and gas leases.

                                       A-1
<PAGE>

                                    Exhibit B
                          Area of Mutual Interest (AMI)

                                 [[MAP GRAPHIC]]

The AMI shall be described as the following  lands in Moffat  County,  Colorado,
and Carbon County, Wyoming.

                             Carbon County, Wyoming

                        Township 13 North, Range 88 West
                        --------------------------------

                        Township 13 North, Range 89 West
                        --------------------------------

                        Township 13 North, Range 90 West
                        --------------------------------
                     Sections: 1-3, 10-15, 22-27, and 34-36

                        Township 12 North, Range 88 West
                        --------------------------------

                        Township 12 North, Range 89 West
                        --------------------------------

                        Township 12 North, Range 90 West
                        --------------------------------
                         Sections: 1-3, 10-15, and 22-24

                             Moffat County, Colorado

                        Township 12 North, Range 89 West
                        --------------------------------

<PAGE>

                                   EXHIBIT "C"

     Attached  to and  made a part of that  certain  Operating  Agreement  dated
February  28, 2003 by and between  Cedar  Ridge LLC,  as  Operator,  and Skyline
Resources,  Inc., and Slaterdome Gas, Inc., as  Non-Operators,  in the Fly Creek
Prospect Moffat County, Colorado, and Carbon County, Wyoming.

                              ACCOUNTING PROCEDURE

                                JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.   Definitions

     "Joint  Property" shall mean the real and personal  property subject to the
     agreement to which this Accounting Procedure is attached.

     "Joint  Operations"  shall mean all operations  necessary or proper for the
     development, operations, protection and maintenance of the Joint Property.

     "Joint Account" shall mean the account showing the charges paid and credits
     received in the conduct of the Joint  Operations and which are to be shared
     by the Parties.

     "Operator" shall mean the party designated to conduct the Joint operations.

     "Non-Operators"  shall mean the  Parties to this  agreement  other than the
     Operator.

     "Parties" shall mean Operator and Non-Operators.

     "First Level Supervisors" shall mean those employees whose primary function
     in Joint  Operations is the direct  supervision of other  employees  and/or
     contract labor directly employed on the Joint Property in a field operating
     capacity.

     "Technical  Employees"  shall  mean  those  employees  having  special  and
     specific  engineering,  geological or other professional  skills, and whose
     primary function in Joint Operations is the handling of specific  operating
     conditions and problems for the benefit of the Joint Property.

     "Personal  Expenses"  shall mean travel and other  reasonable  reimbursable
     expenses of Operator's Employees.

     "Material" shall mean personal property,  equipment or supplies acquired or
     held for use on the Joint Property.

     "Controllable  Material"  shall  mean  Material  which  at the  time  is so
     classified  in  the  Material   Classification   Manual  as  most  recently
     recommended by the Council of Petroleum Accounts Societies.

2.   Statement and Billings

     Operator shall bill  Non-Operators  on or before the last day of each month
     for their  proportionate share of the Join Account for the preceding month.
     Such bills will be accompanied  by statements  which identify the authority
     for expenditure,  lease or facility, and all charges and credits summarized
     by appropriate  classifications of investment and expense except that items
     of  Controllable   Material  and  unusual  charges  and  credits  shall  be
     separately identified and fully described in detail.

3.   Advances and Payments by Non-Operators

     A.   Unless  otherwise  provided  for in the  agreement,  the  Operator may
          require the  Non-Operators  to advance  their share of estimated  cash
          outlay for the succeeding  month's  operation within fifteen (15) days
          after  receipt  of the  billing  or by the  first day of the month for
          which the advance is  required,  whichever  is later.  Operator  shall
          adjust each  monthly  billing to reflect  advances  received  from the
          Non-Operators.

     B.   Each Non-Operator shall pay its proportion of all bills within fifteen
          (15) days after receipt.  If payment is not made within such time, the
          unpaid balance shall bear interest monthly at the prime rate in effect
          at JP  Morgan  Chase  + 3% on the  first  day of the  month  in  which
          delinquency  occurs plus 1% or the maximum  contract rate permitted by
          the applicable  usury laws in the state in which the Joint Property is
          located,  whichever is the lesser,  plus attorney's fees, court costs,
          and other costs in connection with the collection of unpaid amounts.

4.   Adjustments

     Payment of any such bills shall not prejudice the right of any Non-Operator
     to protest or question the  correctness  thereof;  provided,  however,  all
     bills and  statements  rendered to  Non-Operators  by  Operator  during any
     calendar year shall  conclusively  be presumed to be true and correct after
     twenty-four (24) months following the end of any such calendar year, unless
     within the said twenty-four (24) month period a Non-Operator  takes written
     exception thereto and makes claim on Operator for adjustment. No adjustment
     favorable  to  Operator  shall be made  unless it is made  within  the same
     prescribed  period.  The  provisions  of this  paragraph  shall not prevent
     adjustments resulting from a physical inventory of Controllable Material as
     provided for in Section V.

                 COPYRIGHT (C) 1985 by the Council of Petroleum
                             Accountants Societies.

                                       C-1
<PAGE>

5.   Audits

     A.   A  Non-Operator,  upon  notice in  writing to  Operator  and all other
          Non-Operators,  shall have the right to audit Operator's  accounts and
          records relating to the Joint Account for any calendar year within the
          twenty-four (24) month period following the end of such calendar year;
          provided,  however,  the making of an audit  shall not extend the time
          for the taking of written exception to and the adjustments of accounts
          as provided  for in Paragraph 4 of this Section I. Where there are two
          or more  Non-Operators,  the Non-Operators shall make every reasonable
          effort to conduct a joint  audit in a manner  which  will  result in a
          minimum  of  inconvenience  to the  Operator.  Operator  shall bear no
          portion of the Non-Operators' audit cost incurred under this paragraph
          unless  agreed to by the  Operator.  The audits shall not be conducted
          more than once each year without  prior  approval of Operator,  except
          upon the resignation or removal of the Operator,  and shall be made at
          the expenses of those Non-Operators approving such audit.

     B.   The Operator shall reply in writing to an audit report within 180 days
          after  receipt of such report.  The Land Audit  company shall reply to
          the Operator's  response within ninety (90) days after receipt of such
          response.

6.   Approval by Non-Operators

     Where an approval or other  agreement  of the Parties or  Non-Operators  is
     expressly required under other sections of this Accounting Procedure and if
     the agreement to which this  Accounting  Procedure is attached  contains no
     contrary   provisions  in  regard   thereto,   Operator  shall  notify  all
     Non-Operators of the Operator's proposal,  and the agreement or approval of
     a majority in interest of the  Non-Operators  shall be  controlling  on all
     Non-Operators.

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.   Ecological and Environmental

     Costs  incurred  for the  benefit  of the  Joint  Property  as a result  of
     governmental  or  regulatory   requirements  including  environmental  site
     assessments to satisfy environmental considerations applicable to the Joint
     Operations.   Such  costs  may  include   surveys  of  an   ecological   or
     archaeological  nature and  pollution  control  procedures  as  required by
     applicable laws and regulations.

2.   Rentals and Royalties

     Lease rentals and royalties paid by Operator for Joint Operations.

3.   Labor

     A.   (1) Actual and  supportable  salaries  and wages of  Operator's  field
          employees  directly  employed on the Joint  Property in the conduct of
          Joint Operations.

          (2)  Actual and supportable salaries of First Level Supervisors in the
               field.

          (3)  Salaries and wages of Technical  Employees  directly  employed on
               the Joint Property if such charges are excluded from the overhead
               rates.

          (4)  Salaries and wages of Technical  Employees either  temporarily or
               permanently assigned to and directly employed in the operation of
               the Joint Property if such charges are excluded from the overhead
               rates.

     B.   Operator's cost of holiday, vacation, sickness and disability benefits
          and other  customary  allowances  paid to employees whose salaries and
          wages are  chargeable to the Joint Account under  Paragraph 3A of this
          Section  II. Such costs  under this  Paragraph  3B may be charged on a
          "when and as paid basis" or by  "percentage  assessment" on the amount
          of salaries and wages  chargeable to the Joint Account under Paragraph
          3A of this  Section II. If  percentage  assessment  is used,  the rate
          shall be based on the Operator's cost experience.

     C.   Expenditures or contributions made pursuant to assessments  imposed by
          governmental  authority  which  are  applicable  to  Operator's  costs
          chargeable  to the Joint  Account  under  Paragraphs 3A and 3B of this
          Section II.

     D.   Personal  Expenses of those  employees  whose  salaries  and wages are
          chargeable to the Joint Account under Paragraph 3A of this Section II.

4.   Employee Benefits

     Operator's  current costs of established  plans for  employees'  group life
     insurance,  hospitalization,  pension,  retirement, stock purchase, thrift,
     bonus,  and other benefit plans of a like nature,  applicable to Operator's
     labor cost  chargeable to the Joint  Account under  Paragraphs 3A and 3B of
     this Section II shall be  Operator's  actual cost not to exceed the percent
     most  recently   recommended  by  the  Council  of  Petroleum   Accountants
     Societies.

5.   Material

     Material  purchased or furnished by Operator for use on the Joint  Property
     as provided  under Section IV. Only such Material shall be purchased for or
     transferred  to the Joint Property as may be required for immediate use and
     is  reasonably  practical and  consistent  with  efficient  and  economical
     operations. The accumulation of surplus stocks shall be avoided.

6.   Transportation

     Transportation of employees and Material necessary for the Joint Operations
     buy subject to the following limitations:

     A.   If  material  is  moved to the  Joint  Property  from  the  Operator's
          warehouse  or other  properties,  no charge shall be made to the Joint
          Account  for a distance  greater  than the  distance  from the nearest
          reliable  supply  store where like  material is normally  available or
          railway receiving point nearest the Joint Property unless agreed to by
          the Parties.

                                       C-2
<PAGE>

     B.   If surplus Material is moved to Operator's  warehouse or other storage
          point,  no charge  shall be made to the Joint  Account  for a distance
          greater than the distance to the nearest  reliable  supply store where
          like  material  is  normally  available,  or railway  receiving  point
          nearest the Joint Property unless agreed to by the Parties.  No charge
          shall  be made to the  Joint  Account  for  moving  Material  to other
          properties belonging to Operator, unless agreed to by the Parties.

     C.   In the  application  of  subparagraphs  A and B above,  the  option to
          equalize or charge actual  trucking cost is available  when the actual
          charge is $400 or less excluding accessorial charges. The $400 will be
          adjusted to the amount  most  recently  recommended  by the Council of
          Petroleum Accountants Societies.

7.   Services

     The cost of contract services,  equipment and utilities provided by outside
     sources,  except  services  excluded  by  Paragraph  10 of  Section  II and
     Paragraph  I, ii,  and  iii,  of  Section  III:  The  cost of  professional
     consultant  services and contract services of technical  personnel directly
     engaged  on the  Joint  Property  if such  charges  are  excluded  from the
     overhead rates.  The cost of professional  consultant  services or contract
     services of technical  personnel not directly engaged on the Joint Property
     shall not be charged to the Joint Account  unless  previously  agreed to by
     the Parties.

8.   Equipment and Facilities Furnished by Operator

     A.   Operator  shall  charge the Joint  Account for use of  Operator  owned
          equipment  and  facilities  at  rates,   commensurate  with  costs  of
          ownership   and   operation.   Such  rates  shall   include  costs  of
          maintenance,  repairs, other expense,  insurance, taxes, depreciation,
          and interest on gross investment less accumulated  depreciation not to
          exceed twelve  percent ( 12% ) per annum.  Such rates shall not exceed
          average commercial rates currently prevailing in the immediate area of
          the Joint Property.

     B.   In lieu of charges in  paragraph  8A above,  Operator may elect to use
          average commercial rates prevailing in the immediate area of the Joint
          Property les 20%. For automotive equipment,  Operator may elect to use
          rates published by the Petroleum Motor Transport Association.

9.   Damages and Losses to Joint Property

     All costs or  expenses  necessary  for the repair or  replacement  of Joint
     Property  made  necessary  because of damages or losses  incurred  by fire,
     flood, storm, theft,  accident, or other cause, except those resulting from
     Operator's gross negligence or willful  misconduct.  Operator shall furnish
     Non-Operator  written  notice  of  damages  or losses  incurred  as soon as
     practicable after a report thereof has been received by Operator.

10.  Legal Expense

     Expense of  handling,  investigating  and  settling  litigation  or claims,
     discharging of liens,  payment of judgments and amounts paid for settlement
     of claims incurred in or resulting from  operations  under the agreement or
     necessary to protect or recover the Joint  Property,  except that no charge
     for  services  of  Operator's  legal  staff or fees or  expense  of outside
     attorneys  shall be made unless  previously  agreed to by the Parties.  All
     other legal expenses is considered to be covered by the overhead provisions
     of  Section  III  unless  otherwise  agreed  to by the  Parties,  except as
     provided  in  Section  1,  Paragraph  8. All costs  incurred  by  Operator,
     including  legal  fees  paid  to  outside  attorneys,   consultants,   etc.
     associated with hearings before governmental agencies,  title materials and
     examination of title and other matters  deemed  necessary by Operator shall
     be direct charges to the Joint Account.

11.  Taxes

     All taxes of every kind and nature assessed or levied upon or in connection
     with  the  Joint  Property,   the  operation  thereof,  or  the  production
     therefrom,  and which taxes have been paid by the  Operator for the benefit
     of the Parties.  If the ad valorem taxes are based in whole or in part upon
     separate valuations of each party's working interest,  then notwithstanding
     anything to the contrary herein, charges to the Joint Account shall be made
     and paid by the Parties hereto in accordance  with the tax value  generated
     by each party's working interest.

12.  Insurance

     Net  premiums  paid for  insurance  required  to be  carried  for the Joint
     Operations for the protection of the Parties. In the event Joint Operations
     are  conducted  in a state in which  Operator may act as  self0insurer  for
     Worker's  Compensation  and/or  Employers  Liability  under the  respective
     state's laws,  Operator  may, at its  election,  include the risk under its
     self-insurance  program and in that event,  Operator shall include a charge
     at Operator's cost not to exceed manual rates.

13.  Abandonment and Reclamation

     Costs  incurred for  abandonment  and  reclamation  of the Joint  Property,
     including costs required by governmental or other regulatory authority.

14.  Communications

     Cost  of  acquiring,   leasing,   installing,   operating,   repairing  and
     maintaining communication systems, including radio and microwave facilities
     directly   serving  the  Joint   Property.   In  the  event   communication
     facilities/systems  serving the Joint Property are Operator owned,  charges
     to the Joint  Account  shall be made as  provided  in  Paragraph  8 of this
     Section II.

15.  Other Expenditures

     Any other expenditure not covered or dealt with in the foregoing provisions
     of this Section II, or in Section III and which is of direct benefit to the
     Joint  Property and is incurred by the Operator in the necessary and proper
     conduct of the Joint Operations

                                  III. OVERHEAD

1.   Overhead - Drilling and Producing Operations

                                       C-3
<PAGE>

     i.   As compensation for administrative,  supervision,  office services and
          warehousing  costs,  Operator  shall  charge  drilling  and  producing
          operations on either.

          ( X )  Fixed Rate Basis, Paragraph 1A, or
          (   )  Percentage Basis, Paragraph 1B

          Unless  otherwise  agreed to by the  Parties,  such charge shall be in
          lieu of costs and  expenses of all offices and  salaries or wages plus
          applicable  burdens  and  expenses  of  all  personnel,  except  those
          directly  chargeable  under  Paragraph  3A,  Section  II. The cost and
          expense of services from outside sources in connection with matters of
          taxation,   traffic,   accounting  or  matters   before  or  involving
          governmental  agencies shall be considered as included in the overhead
          rates  provided for in the above  selection  Paragraph of this Section
          III unless  such cost and  expense  are agreed to by the  Parties as a
          direct charge to the Joint Account.

     ii.  The  salaries , wages and  Personal  Expenses of  Technical  Employees
          and/or  the cost of  professional  consultant  services  and  contract
          services  of  technical  personnel  directly  employed  on  the  Joint
          Property:

          (    ) shall be covered by the overhead rates, or
          ( X  )  shall not be covered by the overhead rates.

     iii. The  salaries,  wages and  Personal  Expenses of  Technical  Employees
          and/or  the cost of  professional  consultant  services  and  contract
          services of technical  personnel  either  temporarily  or  permanently
          assigned  to and  directly  employed  in the  operation  of the  Joint
          Property:

          (      ) shall be covered by the overhead rates, or
          (    X )  shall not be covered by the overhead rates.

     A.   Overhead - Fixed Rate Basis

     (1)  Operator  shall charge the Joint  Account at the  following  rates per
          well per month:

              Drilling Well Rate $  5,000.00
                                 -------------
                  (Prorated for less than a full month)
              Producing Well Rate  $  600.00

     (2)  Application of Overhead - Fixed Rate Basis shall be as follows:

          (a)  Drilling Well Rate

               (1)  Charges for drilling  wells shall begin on the date the well
                    is  spudded  and  terminate  on the date the  drilling  rig,
                    completion  rig,  or other units used in  completion  of the
                    well is released,  whichever is later, except that no charge
                    shall be made during  suspension  of drilling or  completion
                    operations  for fifteen  (15) or more  consecutive  calendar
                    days.

               (2)  Charges  for  wells  undergoing  any  type  of  workover  or
                    recompletion  for a period of five (5) consecutive work days
                    or more  shall  be  made at the  drilling  well  rate.  Such
                    charges  shall be applied for the period from date  workover
                    operations,  with  rig or  other  units  used  in  workover,
                    commence  through date of rig or other unit release,  except
                    that no charge shall be made during suspension of operations
                    for fifteen (15) or more consecutive calendar days.

          (b)  Producing Well Rates

               (1)  An active well either produced,  dewatered, or injected into
                    for any portion of the month shall be considered as one-well
                    charge for the entire month.

               (2)  Each active  completion in a  multi-completed  well in which
                    production is not  commingled  down hole shall be considered
                    as a one-well charge providing each completion is considered
                    a separate well by the governing regulatory authority.

               (3)  An inactive  gas well shut in because of  overproduction  or
                    failure  of  purchaser  to  take  the  production  shall  be
                    considered  as a one-well  charge  providing the gas well is
                    directly connected to a permanent sales outlet.

               (4)  A  one-well  charge  shall  be made  for the  month in which
                    plugging and  abandonment  operations  are  completed on any
                    well.  This one-well charge shall be made whether or not the
                    well has produced except when drilling well rate applies.

               (5)  All other  inactive  wells  (including  buy not  limited  to
                    inactive wells covered by unit allowable,  lease  allowable,
                    transferred  allowable,  etc.)  shall  not  quality  for  an
                    overhead charge.

     (3)  The well  rates  shall be  adjusted  as of the first day of April each
          year  following  the  effective  date of the  agreement  to which this
          Accounting Procedure is attached.  The adjustment shall be computed by
          multiplying  the rate currently in use by the  percentage  increase or
          decrease in the average  weekly  earnings of Crude  Petroleum  and Gas
          Production Workers for the last calendar year compared to the calendar
          year  preceding  as shown by the index of average  weekly  earnings of
          Crude Petroleum and Gas Production  Workers as published by the United
          States  Department  of  Labor,  Bureau  of  Labor  Statistics,  or the
          equivalent  Canadian  index as  published  by  Statistics  Canada,  as
          applicable.  The adjusted  rates shall be the rates  currently in use,
          plus or minus the computed adjustment.

                                       C-4
<PAGE>

     2.   Overhead - Major Construction

          To compensate Operator for overhead costs incurred in the construction
          and installation of fixed assets,  the expansion of fixed assets,  and
          any other project  clearly  discernible  as a fixed asset required for
          the development  and operation of the Joint  Property.  Operator shall
          either  negotiate a rate prior to the  beginning of  construction,  or
          shall  charge the Joint  Account for overhead  based on the  following
          rates   for   any   Major   Construction    project   in   excess   of
          $____________________________:

          A.   _____3________%  of first $100,000 or total cost if less, plus

          B.   _____2________%  of costs in  excess  of  $100,000  but less than
               $1,000,000, plus

          C.   _____1________% of costs in excess of $1,000,000.

          Total  cost  shall  mean the gross  cost of any one  project.  For the
          purpose of this  paragraph,  the component  parts of a single  project
          shall not be treated  separately and the cost of drilling and workover
          wells and artificial lift equipment shall be excluded.

     3.   Catastrophe Overhead

          To  compensate  Operator for overhead  costs  incurred in the event of
          expenditures  resulting  from a single  occurrence  due to oil  spill,
          blowout,  explosion,  fire, storm, hurricane, or other catastrophes as
          agreed to by the  Parties,  which are  necessary  to restore the Joint
          Property to the  equivalent  condition that existed prior to the event
          causing the expenditures, Operator shall either negotiate a rate prior
          to charging  the Joint  Account for  overhead  based on the  following
          rates:

          A.   ______3__________% of total costs through $100,000; plus

          B.   ______2__________%  of total costs in excess of $100,000 but less
               than  $1,000,000;  plus

          C.   ______1__________% of total costs in excess of $1,000,000.

          Expenditures  subject  to the  overheads  above will not be reduced by
          insurance recoveries, and no other overhead provisions of this Section
          III shall apply.

4.   Amendment of Rates

     The  overhead  rates  provided  for in this Section III may be amended from
     time to time only by mutual  agreement  between the  Parties  hereto if, in
     practice, the rates are found to be insufficient or excessive.

   IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS

Operator is  responsible  for Joint  Account  Material and shall make proper and
timely  charges and  credits  for all  Material  movements  affecting  the Joint
Property.  Operator  shall  provide all Material for use on the Joint  Property;
however,   at  Operator's   option,   such  Material  may  be  supplied  by  the
Non-Operator.  Operator  shall make timely  disposition  of idle and/or  surplus
Material,   such  disposal  being  made  either  through  sale  to  Operator  or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase,  interest of  Non-Operators in surplus
condition A or B Operator  may  purchase,  but shall be under no  obligation  to
purchase,  interest of Non-Operators in surplus  condition A or B Material.  The
disposal of surplus Controllable Material not purchased by the Operator shall be
agreed to by the Parties.

1.   Purchases

     Material  purchased  shall be charged at the price paid by  Operator  after
     deduction  of all  discounts  received.  In case of  Material  found  to be
     defective  or returned  to vendor for any other  reasons,  credit  shall be
     passed  to the Joint  Account  when  adjustment  has been  received  by the
     Operator.

2.   Transfers and Dispositions

     Material furnished to the Joint Property and Material  transferred from the
     Joint Property or disposed of by the Operator,  unless  otherwise agreed to
     by the Parties,  shall be priced on the following  basis  exclusive of cash
     discounts:

          A.   New Material (Condition A)

                                       C-5
<PAGE>

               (1)  Operator  agrees to acquire any tubular  goods for the Joint
                    Account  at  current   competitive  market  prices.  If  the
                    Operator  chooses to u se  tangible  equipment  from its own
                    inventory, or the inventory of any subsidiary, such tangible
                    equipment   shall  be  charged  to  the  joint   account  at
                    competitive  market  prices.  In no event shall the Operator
                    charge the Joint Account for material transfers from its own
                    inventory  at mill or list  prices  when such  prices are in
                    excess  of  competitive  market  price.  Operator  agrees to
                    provide,  upon request,  or during an audit,  information to
                    substantiate   the  prices  charged  to  the  Joint  Account
                    pursuant to this paragraph.

                    Within  180 days after the close of  operations  on any well
                    drilled, recompleted, or worked over, any unused or salvaged
                    tangible  equipment  shall be credited to the Joint Account,
                    offered  proportionately to the Non-Operators  "in-kind", or
                    sold to a third party with a credit  being  reflected on the
                    Joint Account.

               (2)  Line Pipe

                    (a)  Line pipe movements  (except size 24 inch OD and larger
                         with  walls  3/4 inch and over)  30,000  pounds or more
                         shall be  priced  under  provisions  of  tubular  goods
                         pricing  in  Paragraph   A.(1)(a)  as  provided  above.
                         Freight charges shall be calculated from Lorain, Ohio.

                    (b)  Line pipe movements  (except size 24 inch OD and larger
                         with walls 3/4 inch and over) less than  30,000  pounds
                         shall be priced at Eastern mill published  carload base
                         prices  effective  as of  date  of  shipment,  plus  20
                         percent,  plus  transportation  costs  based on freight
                         rates as set forth under  provisions  of tubular  goods
                         pricing  in  Paragraph   A.(1)(a)  as  provided  above.
                         Freight charges shall be calculated from Lorain, Ohio.

                    (c)  Line  pipe 24 inch OD and over  and 3/4  inch  wall and
                         larger shall be priced f.o.b.  the point of manufacture
                         at current new  published  prices  plus  transportation
                         cost to the railway  receiving  point nearest the Joint
                         Property.

                    (d)  Line pipe,  including  fabricated line pipe, drive pipe
                         and conduit not listed on  published  price lists shall
                         be priced at quoted  prices plus freight to the railway
                         receiving point nearest the Joint Property or at prices
                         agreed to by the Parties.

               (3)  Other Material shall be priced at the current new price,  in
                    effect at date of movement,  as listed by a reliable  supply
                    store nearest the Joint  Property,  or point of manufacture,
                    plus  transportation  costs,  if applicable,  to the railway
                    receiving point nearest the Joint Property.

               (4)  Unused new Material,  except tubular  goods,  moved from the
                    Joint Property shall be priced at the current new price,  in
                    effect on date of movement,  as listed by a reliable  supply
                    store nearest the Joint  Property,  or point of manufacture,
                    plus  transportation  costs,  if applicable,  to the railway
                    receiving  point  nearest  the Joint  Property.  Unused  new
                    tubulars  will be priced as provided  above in Paragraph 2 A
                    (1) and (2).

     B.   Good Used Material (Condition B)

          Material in sound and  serviceable  condition  and  suitable for reuse
          without reconditioning:

          (1)  Material moved to the Joint Property

               At seventy-five percent (75%) of current new price, as determined
               by Paragraph A.

          (2)  Material used on and moved from the Joint Property

               (a)  At  seventy-five  percent  (75%) of current  new  price,  as
                    determined  by  Paragraph  A,  if  Material  was  originally
                    charged to the Joint Account as new Material or

               (b)  At  sixty-five  percent  (65%)  of  current  new  price,  as
                    determined  by  Paragraph  A,  if  Material  was  originally
                    charged to the Joint Account as used Material.

          (3)  Material not used on and moved from the Joint Property

               At seventy-five  percent (75%) of current new price as determined
               by Paragraph A.

               The cost of  reconditioning,  if any,  shall be  absorbed  by the
               transferring property.

     C.   Other Used Material

          (1)  Condition C

               Material which is not in sound and serviceable  condition and not
               suitable for its  original  function  until after  reconditioning
               shall be priced at fifty  percent  (50%) of current  new price as
               determined  by Paragraph A. The cost of  reconditioning  shall be
               charged to the  receiving  property,  provided  Condition C value
               plus cost of reconditioning does not exceed Condition B value.

          (2)  Condition D

               Material,  excluding  junk,  no longer  suitable for its original
               purpose,  but useable for some other purpose shall be priced on a
               basis   commensurate  with  its  use.  Operator  may  dispose  of
               Condition D Material under  procedures  normally used by Operator
               without prior approval of Non-Operator.

               (a)  Casing,  tubing,  or drill  pipe used as line pipe  shall be
                    priced as Grade A and B  seamless  line  pipe of  comparable
                    size and weight. Used casing,  tubing or drill pipe utilized
                    as line pipe shall be priced at used line pipe prices.

               (b)  Casing, tubing or drill pipe used as higher pressure service
                    lines than standard line pipe,  e.g. power oil lines,  shall
                    be  priced  under  normal  pricing  procedures  for  casing,
                    tubing,  or drill pipe.  Upset tubular goods shall be priced
                    on a non-upset basis.

          (3)  Condition E

               Junk shall be priced at prevailing  prices.  Operator may dispose
               of Condition E Material  under  procedures  normally  utilized by
               Operator without prior approval of Non-Operators.

                                       C-6
<PAGE>

     D.   Obsolete Material

          Material which is serviceable and usable for its original  function by
          condition  and/or  value of such  Material is not  equivalent  to that
          which would justify a price as provided above may be specially  priced
          as agreed to by the  Parties.  Such price  should  result in the Joint
          Account being  charged with the value of the service  rendered by such
          Material.

     E.   Pricing Conditions

          (1)  Loading or unloading costs may be charged to the Joint Account at
               the rate of  twenty-five  cents  (25(cent)) per hundred weight on
               all  tubular  goods  movements,  in lieu  of  actual  loading  or
               unloading costs  sustained at the stocking point.  The above rate
               shall  be  adjusted  as of the  first  day  of  April  each  year
               following  January  1, 1985 by the same  percentage  increase  or
               decrease used to adjust overhead rates in Section III,  Paragraph
               1.A(3).  Each year, the rate  calculated  shall be rounded to the
               nearest  cent and shall be the rate in effect until the first day
               of April next year. Such rate shall be published each year by the
               Council of Petroleum Accountants Societies.

          (2)  Material  involving erection costs shall be charged at applicable
               percentage of the current knocked-down price of new Material.

3.   Premium Prices

     Whatever  Material is not readily  obtained at published  or listed  prices
     because of national emergencies, strikes or other unusual causes over which
     the Operator has no control,  the Operator may charge the Joint Account for
     the required  Material at the Operator's  actual cost incurred in providing
     such Material, in making it suitable for use, and in moving it to the Joint
     Property;  provided notice in writing is furnished to  Non-Operators of the
     proposed  charge prior to billing  Non-Operators  for such  Material.  Each
     Non-Operator  shall have the right,  by so electing and notifying  Operator
     within ten days after  receiving  notice from Operator,  to furnish in kind
     all or part of his share of such Material  suitable for use and  acceptable
     to Operator.

4.   Warranty of Material Furnished by Operator

     Operator  does not warrant the  Material  furnished.  In case of  defective
     Material,  credit shall not be passed to the Joint Account until adjustment
     has been received by Operator from the Manufacturers or their agents.

                                 V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.   Periodic Inventories, Notice and Representation

     At  reasonable  intervals,  inventories  shall be taken by  Operator of the
     joint Account  Controllable  Material.  Written notice of intention to take
     inventory  shall be given by Operator  at least  thirty (3) days before any
     inventory is to begin so that  Non-Operators  may be  represented  when any
     inventory  is taken.  Failure  of  Non-Operators  to be  represented  at an
     inventory  shall  bind  Non-Operators  to  accept  the  inventory  taken by
     Operator.

2.   Reconciliation and Adjustment of Inventories

     Adjustments  to the Joint Account  resulting from the  reconciliation  of a
     physical  inventory shall be made within six months following the taking of
     the inventory. Inventory adjustments shall be made by Operator to the Joint
     Account for overages and shortages, but, Operator shall be held accountable
     only for shortages due to lack of reasonable diligence.

3.   Special Inventories

     Special  inventories  may be taken  whenever  there is any sale,  change of
     interest, or change of Operator in the Joint Property. It shall be the duty
     of the party  selling  to notify all other  Parties as quickly as  possible
     after the transfer of interest takes place. In such cases,  both the seller
     and the purchaser shall be governed by such inventory. In cases involving a
     change of Operator, all Parties shall be governed by such inventory.

4.   Expense of Conducting Inventories

     A.   The expense of conducting periodic inventories shall not be charged to
          the Joint Account unless agreed to by the Parties.

     B.  The expense of conducting  special  inventories shall be charged to the
         Parties requesting such inventories, except inventories required due to
         change of Operator shall be charged to the Joint Account.

                                       C-7
<PAGE>

                                   EXHIBIT "D"
                                    INSURANCE

OPERATOR, during the term of this Agreement, shall provide or carry insurance
for the benefit and at the expense of the parties hereto as follows:

(A)  Workmen's Compensation and employers liability insurance in compliance with
     the minimum statutory limits for the States of Colorado and Wyoming.

(B)  General Liability Insurance with limits of not less than $1,000,000 per
     occurrence and $2,000,000 aggregate.

(C)  Automobile Public Liability Insurance covering owned, non-owned and hired
     automotive equipment used under this Agreement, with combined single limits
     of not less than $1,000,000. (If automotive equipment used is owned
     exclusively by OPERATOR no charge will be made to the joint account for
     premiums for this coverage.)

(D)  Excess Liability (Umbrella Policy) Insurance with limits of not less than
     $2,000,000 per occurrence and $2,000,000 in the aggregate and excess claims
     made liability with limit of $2,000,000 each loss and $2,000,000 aggregate.

     Losses not covered by Operator's insurance (or by insurance required by
this Agreement to be carried for the benefit and at the expense of the parties
hereto) shall be charged to the joint account.

     Non-Operators, upon request, shall be furnished with insurance certificates
evidencing that the requisite insurance policies are in full force and effect
upon execution of this Agreement.

     Operator shall use reasonable efforts to require all contractors working or
performing services hereunder to comply with Worker's Compensation and
Employer's Liability laws, both state and federal, and said contractors working
or performing other services shall be required to procure and maintain
Comprehensive General liability insurance with policy limits of at least
$1,000,000 per occurrence and said policy, or policies, shall include
contractual liability assumed under any contract as between the contractor and
Operator, and carry such other insurance as Operator deems necessary. All
policies issued to provide coverage as provided for in this section shall be
endorsed to name the Operator and the Parties as additional insureds. All such
policies shall be endorsed with a Waiver of Subrogation as against Operator and
the Parties.

     Each Non-Operator shall have the right and option to elect not to be
covered by any of the above listed insurance coverage's, except as to any
coverage that is required in accordance with the laws of he State of Colorado,
by furnishing Operator a Certificate of Insurance evidencing coverage in amounts
at least equal to the amounts described above. Non-Operator shall not be liable
for its share of the premiums on any coverage listed above that Non-Operator
elects to provide its own coverage.

<PAGE>

EXHIBIT D

<PAGE>
                                   EXHIBIT "E"
                       GAS BALANCING AGREEMENT (AGREEMENT)
                    ATTACHED TO AND MADE PART OF THAT CERTAIN
                   OPERATING AGREEMENT DATED FEBRUARY 28, 2003
                 BY AND BETWEEN CEDAR RIDGE, L. L. C., OPERATOR
      AND SKYLINE RESOURCES, INC., AND SLATERDOME GAS, INC., NON-OPERATORS

1.   Definitions

     The following definitions shall apply to this Agreement:

     1.1. "Arm's Length  Agreement'  shall mean any gas sales  agreement with an
          unaffiliated  purchaser or any gas sales  agreement with an affiliated
          purchaser  where the sales price and  delivery  conditions  under such
          agreement  are  representative  of  prices  and  delivery   conditions
          existing   under  other   similar   agreements  in  the  area  between
          unaffiliated  parties at the same time for natural  gas of  comparable
          quality and quantity.

     1.2. "Balancing  Area" shall mean all of the acreage and depths  subject to
          the Operating Agreement except as provided in Section 2.2 hereof.

     1.3. "Full Share of Current  Production" shall mean the Percentage Interest
          of each Party in the Gas actually  produced  from the  Balancing  Area
          during each month.

     1.4. "Gas"  shall mean all  hydrocarbons  produced or  producible  from the
          Balancing  Area,  whether from a well classified as an oil well or gas
          well by the  regulatory  agency having  jurisdiction  in such matters,
          which are or may be made available for sale or separate disposition by
          the Parties,  excluding oil, condensate and other liquids recovered by
          field  equipment  operated  for the  joint  account.  "Gas"  does  not
          include, gas used in joint operations,  such as for fuel, recycling or
          reinjection,  or which is vented or lost prior to its sale or delivery
          from the Balancing Area.

     1.5. "Makeup Gas" shall mean any Gas taken by an  Underproduced  Party from
          the Balancing Area in excess of its Full Share of Current  Production,
          whether pursuant to Section 3.3 or Section 4.1 hereof.

     1.6. "Mcf shall mean one thousand cubic feet A cubic foot of Gas shall mean
          the volume of gas  contained  in one cubic foot of space at a standard
          pressure base and at a standard temperature base.

     1.7. "MMBtu"  shall  mean one  million  British  Thermal  Units.  A British
          Thermal  Unit shall mean the  quantity  of heat  required to raise one
          pound  avoirdupois of pure water from 58.5 degrees  Fahrenheit to 59.5
          degrees  Fahrenheit at a constant  pressure of 14.73 pounds per square
          inch absolute.

                                       E-1
<PAGE>

     1.8. "Operator"  shall mean the individual or entity  designated  under the
          terms of the operating  Agreement  or, in the event this  Agreement is
          not employed in connection with an operating agreement, the individual
          or entity  designated  as the  operator of the well(s)  located in the
          Balancing Area.

     1.9. "Overproduced  Party?  shall  mean any  Party  having  taken a greater
          quantity of Gas from the Balancing Area than the  Percentage  Interest
          of such Party in the cumulative  quantity of all Gas produced from the
          Balancing Area.

     1.10."Overproduction"  shall mean the cumulative quantity of Gas taken by a
          Party in excess of its Percentage  Interest in the cumulative quantity
          of all Gas produced from the Balancing Area.

     1.11."Party"  shall  mean those  individuals  or  entities  subject to this
          Agreement,  and their respective  heirs,  successors,  transferees and
          assigns.

     1.12."Percentage  Interest?  shall mean the percentage or decimal  interest
          of each Party in the Gas produced from the Balancing  Area pursuant to
          the Operating Agreement covering the Balancing Area.

     1.13."Royalty"  shall mean payments on production of Gas from the Balancing
          Area to all  owners of  royalties,  overriding  royalties,  production
          payments or similar interests.

     1.14."Underproduced  Party"  shall  mean any  Party  having  taken a lesser
          quantity of Gas from the Balancing Area than the  Percentage  Interest
          of such Party in the cumulative  quantity of all Gas produced from the
          Balancing Area.

     1.15."Underproduction"  shall mean the  deficiency  between the  cumulative
          quantity  of Gas taken by a Party and its  Percentage  Interest in the
          cumulative quantity of all Gas produced from the Balancing Area.

     1.16.?Winter  Period" shall mean the months of November and December in one
          calendar  year and the months of  January,  February  and March in the
          succeeding calendar year.

2.   Balancing Area

     2.1. If this  Agreement  covers more than one  Balancing  Area, it shall be
          applied  as if each  Balancing  Area  were  covered  by  separate  but
          identical agreements. All balancing hereunder shall be on the basis of
          Gas taken from the Balancing Area measured in MMBtus.

     2.2. In the event that all or part of the Gas deliverable  from a Balancing
          Area is or becomes subject to one or more  governmentally  established
          maximum lawful prices,  any Gas not subject to price controls shall be
          considered as produced from a single Balancing Area and Gas subject to
          each  price  category  shall be  considered  produced  from a separate
          Balancing  Area.  Within ninety (90) days after the effective  date of
          such price regulation,  the Operator shall furnish the other Parties a
          Statement of Balances  prepared in accordance with Section 5.1 hereof,
          showing  the  then-current   account  balances  as  to  each  separate
          Balancing  Area so  established.  It is  specifically  understood  and
          agreed that the  enactment of price  regulation  shall not trigger the
          cash settlement provisions of Section 7 hereof.

                                      E-2
<PAGE>

3.   Right of Parties to Take Gas

     3.1. Each Party desiring to take Gas will notify the Operator, or cause the
          Operator to be  notified,  of the volumes  nominated,  the name of the
          transporting  pipeline and the pipeline contract number (if available)
          and meter station  relating to such delivery,  sufficiently in advance
          for the  Operator,  acting  with  reasonable  diligence,  to meet  all
          nomination and other  requirements.  Operator is authorized to deliver
          the volumes so nominated and confirmed (if  confirmation  is required)
          to the  transporting  pipeline  in  accordance  with the terms of this
          Agreement.

     3.2. Each Party shall make a reasonable, good faith effort to take its Full
          Share of  Current  Production  each  month,  to the  extent  that such
          production  is required to maintain  leases in effect,  to protect the
          producing  capacity of a well or  reservoir,  to preserve  correlative
          rights, or to maintain oil production.

     3.3. When a Party  fails for any  reason to take its full  Share of Current
          Production  (as such  Share may be  reduced  by the right of the other
          parties to make up for Underproduction as provided herein),  the other
          Parties  shall be  entitled  to take any Gas which such Party fails to
          take.  To the  extent  practicable,  such Gas shall be made  available
          initially  to each  Underproduced  Party  in the  proportion  that its
          Percentage   Interest  in  the  Balancing  Area  bears  to  the  total
          Percentage  Interests of all  Underproduced  Parties  desiring to take
          such Gas. If all such Gas is not taken by the  Underproduced  Parties,
          the  portion  not  taken  shall  then be made  available  to the other
          Parties in the proportion that their respective  Percentage  Interests
          in the Balancing Area bear to the total  Percentage  Interests of such
          Parties.

     3.4. All Gas taken by a Party in  accordance  with the  provisions  of this
          Agreement,  regardless  of  whether  such  Party is  underproduced  or
          overproduced,  shall be regarded as Gas taken for its own account with
          title thereto being in such taking Party.

     3.5. Notwithstanding  the provisions of Section 3.3 hereof, no Overproduced
          Party  shall be  entitled  in any  month to take any Gas in  excess of
          three  hundred  percent  (300%)  of  its  Percentage  Interest  of the
          Balancing Area's then-current Maximum Monthly Availability;  provided,
          however,  that this  limitation  shall not apply to the extent that it
          would  preclude  production  that is  required  to  maintain  lease in
          effect, to protect the producing  capacity of a well or reservoir,  to
          preserve  correlative rights, or to maintain oil production.  "Maximum
          Monthly  Availability"  shall mean the maximum average monthly rate of
          production at which Gas can be delivered  from the Balancing  Area, as
          determined by the Operator,  considering  the maximum  efficient  well
          rate for each well within the Balancing Area, the maximum allowable(s)
          set  by  the  appropriate   regulatory  agency,   mode  of  operation,
          production facility capabilities and pipeline pressures.

                                       E-3
<PAGE>

     3.6. In the event that a Party fails to make  arrangements to take its Full
          Share of Current Production required to be produced to maintain leases
          in effect,  to protect the producing  capacity of a well or reservoir,
          to preserve  correlative  rights,  or to maintain oil production,  the
          Operator  may sell  any part of such  Party's  Full  Share of  Current
          Production that such Party fails to take for the account of such Party
          and render to such Party, on a current basis, the full proceeds of the
          sale, less any reasonable marketing, compression,  treating, gathering
          or transportation  costs incurred directly in connection with the sale
          of  such  Full  Share  of  Current  Production.  In  making  the  sale
          contemplated  herein,  the Operator  shall be obligated only to obtain
          such price and  conditions  for the sale as are  reasonable  under the
          circumstances  and shall not be obligated to share any of its markets.
          Any such sale by  Operator  under the terms  hereof  shall be only for
          such  reasonable  periods of time as are  consistent  with the minimum
          needs of the industry  under the particular  circumstances,  but in no
          event  for a  period  in  excess  of  one  year.  Notwithstanding  the
          provisions  of Article  3.4 hereof,  Gas sold by Operator  for a Party
          under the  provisions  hereof  shall be deemed to be Gas taken for the
          account of such Party.

4.   In-Kind Balancing

     4.1. Effective  the  first day of any  calendar  month  following  at least
          thirty  (30)  days'  prior  written   notice  to  the  Operator,   any
          Underproduced Party may begin taking, in addition to its Full Share of
          Current Production and any Makeup Gas taken pursuant to Section 3.3 of
          this  Agreement,   a  share  of  current   production   determined  by
          multiplying  twenty-five  percent  (25%) of the Full Shares of Current
          Production of all Underproduced  Parties by a fraction,  the numerator
          of which is the Percentage  Interest of such  Underproduced  Party and
          the  denominator of which is the total of the Percentage  Interests of
          all  Underproduced  Parties  desiring  to take Makeup Gas. In no event
          will  an   Overproduced   Party  be  required  to  provide  more  than
          twenty-five  percent (25%) of its Full Share of Current Production for
          Makeup Gas. The Operator will promptly notify all Overproduced Parties
          of the election of an Underproduced Party to begin taking Makeup Gas.

     4.2. Notwithstanding  the  provisions  of Section 4.1, the average  monthly
          amount of Makeup Gas taken by an Underproduced Party during the Winter
          Period  pursuant to Section  4.1 shall not exceed the average  monthly
          amount of Makeup Gas taken by such Underproduced  Party during the six
          (6) months immediately preceding the Winter Period.

5.   Statement of Gas Balances

                                       E-4
<PAGE>

     5.1. The Operator  will  maintain  appropriate  accounting on a monthly and
          cumulative  basis of the volumes of Gas that each party is entitled to
          receive and the volumes of Gas actually taken or sold for each Party's
          account.  Within  forty-five  days after the month of production,  the
          Operator  will  furnish a  statement  for such month  showing (1) each
          Party's Full Share of Current Production,  (2) the total volume of Gas
          actually  taken or sold for each Party's  account,  (3) the difference
          between the volume  taken by each Party and that Party?s Full Share of
          Current Production,  (4) the Overproduction or Underproduction of each
          Party,  and (5) other data as  recommended  by the  provisions  of the
          Council of Petroleum Accountants Societies Bulletin No. 24, as amended
          or supplemented hereafter. Each Party taking Gas will promptly provide
          to the Operator any data required by the Operator for  preparation  of
          the statements required hereunder.

     5.2. If any Party  fails to provide the data  required  herein for four (4)
          consecutive production months, the Operator, or where the Operator has
          failed to provide data,  another  Party,  may audit the production and
          Gas sales and  transportation  volumes of the  non-reporting  Party to
          provide the required  data.  Such audit shall be conducted  only after
          reasonable  notice and during normal  business  hours in the office of
          the Party whose records are being audited.  All costs  associated with
          such  audit will be  charged  to the  account of the Party  failing to
          provide the required data.

6.   Payments on Production

     6.1. Each Party taking Gas shall pay or cause to be paid all production and
          severance  taxes  due on all  volumes  of Gas  actually  taken by such
          Party.

     6.2. Each Party shall pay or cause to be paid all Royalty due with  respect
          to  Royalty  owners to whom it is  accountable  as if such  Party were
          taking its Full Share of Current  Production,  and only its Full Share
          of Current Production.

     6.3. In the event that any  governmental  authority  requires  that Royalty
          payments  be made on any other  basis than that  provided  for in this
          Section  6,  each  Party   agrees  to  make  such   Royalty   payments
          accordingly,  commencing  on  the  effective  date  required  by  such
          governmental  authority,  and the method  provided for herein shall be
          thereby superseded.

7.   Cash Settlements

     7.1. Upon the earlier of the plugging and abandonment of the last producing
          interval in the  Balancing  Area,  the  termination  of the  Operating
          Agreement  or any pooling or unit  agreement  covering  the  Balancing
          Area,  or at any time no Gas is taken  from the  Balancing  Area for a
          period of twelve (12) consecutive  months,  any Party may give written
          notice calling for cash  settlement of the Gas  production  imbalances
          among the  Parties.  Such notice  shall be given to all Parties in the
          Balancing Area.

     7.2. Within  sixty (60) days after the notice  calling for cash  settlement
          under Section 7.1, the Operator will  distribute to each Party a Final
          Gas Settlement Statement detailing the quantity of Overproduction owed
          by each Overproduced Party to each Underproduced Party and identifying
          the month to which such Overproduction is attributed,  pursuant to the
          methodologv set out in Section 7.4.

                                       E-5
<PAGE>

     7.3. Within  sixty  (60) days  after  receipt  of the Final Gas  Settlement
          Statement each Overproduced Party will pay to each Underproduced Party
          entitled to settlement the appropriate cash settlement, accompanied by
          appropriate   accounting   detail.   At  the  time  of  payment,   the
          Overproduced  Party will  notify  the  Operator  of the Gas  imbalance
          settled by the Overproduced Party's payment.

     7.4. The  amount  of the cash  settlement  will be  based  on the  proceeds
          received by the Overproduced Party under an Arm's length Agreement for
          the Gas taken from time to time by the Overproduced Party in excess of
          the Overproduced Party's Full Share of Current Production.  Any Makeup
          Gas taken by the  Underproduced  Party  prior to  monetary  settlement
          hereunder will be applied to offset Overproduction  chronologically in
          the order of accrual.

     7.5. The values used for calculating the cash settlement  under Section 7.4
          will  include  all  proceeds  received  for the sale of the Gas by the
          Overproduced  Party  calculated at the Balancing Area, after deducting
          any production or severance  taxes paid and any Royalty  actually paid
          by  the  Overproduced  Party  to  an  Underproduced   Party's  Royalty
          owner(s),  to the extent said payments amounted to a discharge of said
          Underproduced  Party's Royalty  obligation,  as well as any reasonable
          marketing,  compression,  treating,  gathering or transportation costs
          incurred directly in connection with the sale of the Overproduction.

     7.6. For Overproduction processed for the account of the Overproduced Party
          at a gas processing  plant for the extraction of liquid  hydrocarbons,
          the full quantity of the Overproduction will be valued for purposes of
          cash settlement at the prices received by the  Overproduced  Party for
          the sale of the residue gas attributable to the Overproduction without
          regard to proceeds  attributable to liquid hydrocarbons which may have
          been extracted from the Overproduction.

     7.7. To the extent the Overproduced  Party did not sell all  Overproduction
          under an Arm's Length Agreement,  the cash settlement will be based on
          the weighted average price received by the Overproduced  Party for any
          gas sold from the Balancing Area under Arm's Length  Agreements during
          the months to which such  Overproduction  is attributed.  In the event
          that no sales under Arm's length  Agreements were made during any such
          month,  the cash  settlement  for such month will be based on the spot
          sales prices published for the applicable  geographic area during such
          month in a mutually acceptable pricing bulletin.

                                       E-6
<PAGE>

     7.8. Interest per annum at the then-current  prime rate of Citibank,  N.A.,
          New York, New York, as published under "Money Rate" by The Wall Street
          Journal,  or the maximum  lawful rate of  interest  applicable  to the
          Balancing  Area,  whichever  is less,  will accrue for all amounts due
          under Section 7.1,  beginning the first day following the date payment
          is due pursuant to Section 7.3.  Such  interest  shall be borne by the
          Operator  or any  Overproduced  Party  in the  proportion  that  their
          respective  delays beyond the deadlines set out in Sections 7.2 or 7.3
          contributed to the accrual of the interest.

     7.9. In  lieu  of  the  cash   settlement   required  by  Section  7.3,  an
          Overproduced Party may deliver to the Underproduced  Party an offer to
          settle its Overproduction in-kind and at such rates, quantities, times
          and sources as may be agreed upon by the  Underproduced  Party. If the
          Parties  are unable to agree  upon the  manner in which  such  in-kind
          settlement  gas will be  furnished  within  sixty  (60) days after the
          Overproduced  Party's  offer to settle in kind,  which  period  may be
          extended by agreement of said Parties,  the  Overproduced  Party shall
          make a cash  settlement  as provided in Section  7.3. The making of an
          in-kind  settlement  offer  under this  Section 7.9 will not delay the
          accrual of interest on the cash settlement  should the Parties fail to
          reach agreement on an in-kind settlement.

     7.10.At any time during the term of this Agreement,  any Overproduced Party
          may,  in  its  sole  discretion,  make  cash  settlement(s)  with  the
          Underproduced  Parties  covering  all or part of its  outstanding  Gas
          imbalance,  provided  that  such  settlements  must be made  with  all
          Underproduced Parties proportionately based on the relative imbalances
          of  the  Underproduced   Parties,   and  provided  further  that  such
          settlements  may not be made more often  than once  every  twenty-four
          (24) months.  Such  settlements  will be calculated in the same manner
          provided above for final cash settlements. The Overproduced Party will
          provide  Operator a detailed  accounting  of any such cash  settlement
          within thirty (30) days after the settlement is made.

8.   Testing

     Notwithstanding any provision of this Agreement to the contrary,  any Party
     shall have the  right,  from time to time,  to  produce  and take up to one
     hundred percent (100%) of a well's entire Gas stream to meet the reasonable
     deliverability  test(s)  required by such  Party's Gas  purchaser,  and the
     right to take any Makeup Gas shall be subordinate to the right of any party
     to  conduct  such  tests;  provided,  however,  that  such  tests  shall be
     conducted in accordance with prudent operating  practices only after thirty
     (30) days' prior  written  notice to the  Operator and shall last no longer
     than forty-eight (48) hours.

9.   Operating Costs

     Nothing in this Agreement shall change or affect any Party's  obligation to
     pay its  proportionate  share of all  costs  and  liabilities  incurred  in
     operations  on or in  connection  with the  Balancing  Area,  as its  share
     thereof is set forth in the Operating Agreement irrespective of whether any
     party is at any time selling and using Gas or whether such sales or use are
     in proportion to its Percentage Interest in the Balancing Area.

                                       E-7
<PAGE>

10.  Liquids

     The Parties shall share  proportionately in and own all liquid hydrocarbons
     recovered  with Gas by field  equipment  operated for the joint  account in
     accordance with their Percentage Interests in the Balancing Area.

11.  Audit Rights

     Notwithstanding  any  provision in this  Agreement  or any other  agreement
     between the Parties hereto, and further  notwithstanding any termination or
     cancellation of this Agreement,  for a period of two (2) years from the end
     of the calendar year in which any information to be furnished under Section
     5 or 7 hereof  is  supplied,  any Party  shall  have the right to audit the
     records of any other Party regarding quantity, including but not limited to
     information  regarding Btu content Any.  Underproduced Party shall have the
     right for a period of two (2) years  from the end of the  calendar  year in
     which any cash  settlement  is received  pursuant to Section 7 to audit the
     records of any  Overproduced  Party as to all  matters  concerning  values,
     including but not limited to' information  regarding prices and disposition
     of Gas from the  Balancing  Area.  Any such audit shall be conducted at the
     expense of the Party or Parties desiring such audit and shall be conducted,
     after reasonable notice,  during normal business hours in the office of the
     Party whose records are being audited. Each Party hereto agrees to maintain
     records as to the volumes and prices of Gas sold each month and the volumes
     of Gas used in its own operations,  along with the Royalty paid on any such
     Gas used by a Party in its own operations. The audit rights provided for in
     this  Section 11 shall be in addition to those  provided for in Section 5.2
     of this Agreement.

12.  Miscellaneous

     12.1.As between  the  Parties,  in the event of any  conflict  between  the
          provisions  of this  Agreement  and the  provisions  of any gas  sales
          contract,  or in the event of any conflict  between the  provisions of
          this  Agreement and the  provisions of the  Operating  Agreement,  the
          provisions of this Agreement shall govern.

     12.2.Each Party  agrees to defend,  indemnify  and hold  harmless all other
          Parties from and against any and all liabilities for any claims, which
          may be asserted by any third party which now or hereafter  stands in a
          contractual  relationship with such indemnifying Party and which arise
          out of the  operation  of this  Agreement  or any  activities  of such
          indemnifying  Party under the  provisions  of this  Agreement and does
          further agree to save the other Parties harmless from all judgments or
          damages sustained and costs incurred in connection therewith.

                                       E-8
<PAGE>

     12.3.Except  as  otherwise   provided  in  this   Agreement,   Operator  is
          authorized to administer the provisions of this  Agreement,  but shall
          have no  liability  to the  other  Parties  for  losses  sustained  or
          liability  incurred  which  arise  out of or in  connection  with  the
          performance of Operator's duties hereunder,  except such as may result
          from Operator's gross negligence or willful misconduct. Operator shall
          not be  liable  to any  Underproduced  Party  for the  failure  of any
          Overproduced  Party  (other than  Operator)  to pay any  amounts  owed
          pursuant to the terms hereof.

     12.4.This  Agreement  shall  remain in full force and effect for as long as
          the  Operating  Agreement  shall  remain in force and effect as to the
          Balancing  Area,  and  thereafter  until the Gas accounts  between the
          Parties are settled in full,  and shall inure to the benefit of and be
          binding  upon  the  Parties  hereto,   and  their  respective   heirs,
          successors,  legal  representatives  and assigns,  if any. The Parties
          hereto agree to give notice of the existence of this  Agreement to any
          successor  in interest of any such Party and to provide  that any such
          successor shall be bound by this Agreement, and shall further make any
          transfer of any interest  subject to the Operating  Agreement,  or any
          part thereof, also subject to the terms of this Agreement.

     12.5.Unless the  context  clearly  indicates  otherwise,  words used in the
          singular include the plural, the plural includes the singular, and the
          neuter gender includes the masculine and the feminine.

     12.6.This  Agreement   shall  bid  the  Parties  in  accordance   with  the
          provisions   hereof,   and  nothing   herein  shall  be  construed  or
          interpreted  as  creating  any  rights in any  person or entity  not a
          signatory  hereto,  or as  being a  stipulation  in  favor of any such
          person or entity.

     12.7.If  contemporaneously  with  this  Agreement  becoming  effective,  or
          thereafter,  any  Party  requests  that any  other  Party  execute  an
          appropriate  memorandum  or notice of this  Agreement in order to give
          third parties  notice of record of same and submits same for execution
          in recordable  form,  such memorandum or notice shall be duly executed
          by the Party to which  such  request  is made and  delivered  promptly
          thereafter  to the Party  making the  request  Upon  receipt the Party
          making the  request  shall cause the  memorandum  or notice to be duly
          recorded in the appropriate  real property or other records  affecting
          the Balancing Area.

     12.8.In the event Internal  Revenue Service  regulations  require a uniform
          method of computing  taxable income by all Parties,  each Party agrees
          to compute and report  income to the  Internal  Revenue  Service as if
          such Party were  taking  its Full Share of Current  Production  during
          each relevant tax period in accordance with such regulations,  insofar
          as same relate to entitlement method tax computations.

13.  Assignment and Rights upon Assignment

                                       E-9
<PAGE>

     13.1.Subject  to the  provisions  of  Section  13.2  and 13.3  hereof,  and
          notwithstanding  anything  in  this  Agreement  or  in  the  Operating
          Agreement to the contrary,  if any Party assigns  (including any sale,
          exchange  or  other  transfer)  any of  its  working  interest  in the
          Balancing  Area when such Party is an  Underproduced  or  Overproduced
          Party,  the assignment or other act of transfer shall,  insofar as the
          Parties hereto are concerned, include all interest of the assigning or
          transferring Party in the Gas, all rights to receive or obligations to
          provide or take Makeup Gas and all rights to receive or obligations to
          make any monetary  payment which may ultimately be due  hereunder,  as
          applicable.  Operator  and  each of the  other  Parties  hereto  shall
          thereafter  treat the  assignment  accordingly,  and the  assigning or
          transferring  Party  shall  look  solely  to  its  assignee  or  other
          transferee  for any interest in the Gas or monetary  payment that such
          Party may have or to which it may be  entitled,  and  shall  cause its
          assignee or other transferee to assume its obligations hereunder.

     13.2.Notwithstanding  anything in this Agreement (including but not limited
          to  the  provisions  of  Section  13.1  hereof)  or in  the  Operating
          Agreement to the  contrary,  and subject to the  provisions of Section
          13.3  hereof,  in the event an  Overproduced  Party  intends  to sell,
          assign,  exchange  or  otherwise  transfer  any of its  interest  in a
          Balancing  Area, such  Overproduced  Party shall notify in writing the
          other working interest owners who are Parties hereto in such Balancing
          Area of such  fact at least  sixty  (60)  days  prior to  closing  the
          transaction.  Such notice  shall  contain a Gas  Settlement  Statement
          detailing  the  quantity of  Overproduction  owed by the  Overproduced
          Party to each Underproduced Party and the value of such Overproduction
          calculated  in  accordance  with  Sections  7.4  through  7.7  hereof.
          Thereafter,  any Underproduced Party may demand from such Overproduced
          Party in  writing,  within  thirty  (30)  days  after  receipt  of the
          Overproduced  Party's notice, a cash settlement of its Underproduction
          from the Balancing  Area.  The Operator  shall be notified of any such
          demand and of any cash settlement pursuant to this Section 13, and the
          Overproduction  and  Underproducton  of each Party  shall be  adjusted
          accordingly.  Any cash settlement pursuant to this Section 13 shall be
          paid by the Overproduced Party,  accompanied by appropriate accounting
          detail, on or before the earlier to occur (1) of sixty (60) days after
          receipt of the  Underproduced  Party's demand or (2) at the closing of
          the  transaction  in which  the  Overproduced  Party  sells,  assigns,
          exchanges or otherwise  transfers its interest in a Balancing  Area on
          the same basis as otherwise set forth in Sections 7.3 through 7.7, and
          shall  bear  interest  at the rate set forth in  Section  7.8  hereof,
          beginning  sixty  (60)  days  after  the  Overproduced  Party's  sale,
          assignment, exchange or transfer of its interest in the Balancing Area
          for any  amounts not paid.  Provided,  however,  if any  Underproduced
          Party does not so demand such cash  settlement of its  Underproduction
          from  the  Balancing  Area,  such   Underproduced   Party  shall  look
          exclusively  to the  assignee  or other  successor  in interest of the
          Overproduced  Party giving notice  hereunder for the  satisfaction  of
          such  Underproduced  Party's  Underproduction  in accordance  with the
          provisions of Section 13.1 hereof.

                                      E-10
<PAGE>

     13.3.The  provisions  of this  Section  13 shall not be  applicable  in the
          event any Party  mortgages its interest or disposes of its interest by
          merger, reorganization,  consolidation or sale of substantially all of
          its assets to a  subsidiary  or parent  company,  or to any company in
          which any parent or  subsidiary  of such party owns a majority  of the
          stock of such company.

14.  Counterparts

     This  Agreement may be executed in  counterparts,  each of which when taken
     with all other  counterparts  shall constitute a binding  agreement between
     the Parties hereto.

     IN WITNESS  WHEREOF,  this agreement  shall be effective as of February 28,
2003.

                                      E-11
<PAGE>

                                   EXHIBIT "F"

                   Attached to and made a part of that certain
                   Operating Agreement dated February 28, 2003
                                , by and between
                      Cedar Ridge, L.L.C., as Operator, and
      Skyline Resources, Inc., and Slaterdome Gas, Inc. , as Non-Operators

Appropriate Operator and any successor, substitute or replacement therefor is
considered a "Contractor" of the Federal Government and subject to the terms,
provisions, and representations set forth below. By execution or ratification
of, or joinder in, this agreement, or by accepting the benefits hereof in any
way, each party so situated hereby ratifies, adopts and confirms the following
as "Contractor":

1.   To the extent applicable to this Agreement, Contractor agrees to
     incorporate herein by reference and comply with the following clauses
     contained in the Code of Federal Regulations (including any revision and
     redesignation thereof), the full text of which will be made available upon
     request:

     a.   48 C.F.R ss.52.203-6 (Subcontractor Sales to Government); 48 C.F.R.
          ss.ss.52.219-8 and 52.219-9 (Utilization of Small and Disadvantaged
          Business Concerns); 48 C.F.R. ss.52.219-13 (Utilization of Women-Owned
          Business Concerns); 48 C.F.R. ss.ss.22.804-1 and 52.222-26 and 41
          C.F.R. ss.60-1.4 (Equal Opportunity); 48 C.F.R. ss. ss.52.222-35 and
          52.222-37 and 41 C.F.R. 60-250.4 (Disabled and Vietnam Era Veterans);
          48 C.F.R. ss.52.222-36 and 41 C.F.R. ss.60-741.4 (Handicapped
          Workers); 48 C.F.R. ss.52.223-2 (Clean Air and Water); and 48 C.F.R.
          ss.52.223-3 (Hazardous Material Identification and Material Safety
          Data). Contractor also agrees: (i) to comply with all applicable
          requirements of the Clean Air Act, the Federal Water Pollution Control
          Act and the regulations and guidelines issued under each; (ii) that no
          portion of the work required by this contract will be performed in a
          facility listed on the Environmental Protection Agency List of
          Violating Facilities on the date when this contract was executed
          unless and until the EPA eliminates the name of such facility or
          facilities from such listing; (iii) to use its best efforts to comply
          with clean air standards and clean water standards at the facility in
          which the contract is being performed; and (iv) to insert the
          substance of the provisions of this Paragraph into any nonexempt
          subcontract or purchase order as required.

     b.   In addition to those specifically referenced herein, Contractor shall
          comply with all other Federal, State and local laws, rules and
          regulations (including but not limited to those related to the
          environment and waste management, such as RCRA and CERCLA, and to
          safety and health, such as OSHA) which are now, or in the future may
          become, applicable to Contractor, its business, equipment and
          personnel, in relation to the work and to Contractor's performance
          hereunder.

2.   Contractor certifies that it does not and will not maintain or provide for
     its employees any facilities which are segregated by race, color, religion
     or national origin, or permit its employees to perform any services at any
     location, under its control, where segregated facilities are maintained and
     Contractor will obtain a similar certification for all non-exempt
     subcontractors, as required by 41 C.F.R. Section 60-18.

3.   Contractor certifies that none of its employees who perform work pursuant
     to this contract or who may hereafter do so pursuant to this contract are
     or will be unauthorized aliens as defined in the Immigration Reform and
     Control Act of 1986 ("IRCA"), 38 U.S.C.A., as amended, ss.2011, et seq.,
     and Contractor certifies further that it complies with said statute and the
     implementing regulations. Contractor further agrees to obtain a
     certification from its contractors performing work related to this contract
     that none of their employees are unauthorized aliens as defined by IRCA and
     that such contractors comply with the statute.

                                       F-1
<PAGE>

PRODUCERS 88-PAID UP
Rev 94RT - Rocky Mtn CBM (Rev 2000)

                                   EXHIBIT "G"

          Attached to and made a part of that certain Operating  Agreement dated
          February 28, 2003, by and between Cedar Ridge, L.L.C. as Operator, and
          Skyline Resources, Inc. and Slaterdome Gas, Inc., as Non-Operators

                                OIL AND GAS LEASE

     AGREEMENT, Made and entered into the   day of        , 200   by and between
                                         ---      -------      ---
                                                                whose address is
----------------------------------------------------------------
                           , hereinafter called Lessor (whether one or more) and
--------------------------
                             whose   address is
----------------------------                    --------------------------------
hereinafter called Lessee:

WITNESSETH,  That the Lessor, for and in consideration of TEN AND MORE ($10.00+)
DOLLARS cash in hand paid, the receipt and sufficiency are hereby  acknowledged,
and the covenants and agreements  hereinafter contained,  has granted,  demised,
leased  and  let,  and by these  presents  does  grant,  demise,  lease  and let
exclusively  unto the said  Lessee,  the land  hereinafter  described,  with the
exclusive  right for the purpose of mining,  exploring by geophysical  and other
methods,  and  operating  for  and  producing  therefrom  oil,  gas,  and  other
hydrocarbons   and  all  other  minerals  or  substances,   whether  similar  or
dissimilar,  including,  but not limited to, coalbed methane,  helium, nitrogen,
carbon dioxide,  and all substances produced in association  therewith from coal
bearing  formations  or  elsewhere,  that may be produced  from any well drilled
under the terms of this lease,  with rights of way and easements for laying pipe
lines and servicing or drilling  other wells in the vicinity of said lands,  and
erection of structures thereon to produce,  save and take care of said products,
all that certain tract of land, together with any reversionary, remaindermen and
executory  rights  therein,  situated in County , described as follows,  to-wit:

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

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

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

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

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

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

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

and containing    acres, more or less,  together  with all strips or  parcels of
              ----
land (not, however, to be construed to include parcels comprising a - regular
40-acre legal subdivision or lot of approximately  corresponding size) adjoining
or contiguous to the above described land and owned or claimed by Lessor.

1.   It is agreed that this lease shall remain in force for a term of years from
     this date and as long thereafter as oil or gas of whatsoever nature or kind
     is produced from said leased  premises or on acreage pooled  therewith,  or
     drilling operations are continued as hereinafter provided. For the purposes
     of this lease, a well  completed for the production of coalbed  methane gas
     shall be deemed to be  producing  gas under  this  lease at all times  when
     dewatering  of the coal seams from which the  coalbed  methane  gas will be
     produced is  occurring.  If, at the  expiration of the primary term of this
     lease,  oil or gas is not  being  produced  on the  leased  premises  or on
     acreage  pooled  therewith  but  Lessee  is then  engaged  in  drilling  or
     re-working  operations thereon,  then this lease shall continue in force so
     long as operations are being continuously prosecuted on the leased premises
     or on acreage pooled  therewith;  and operations  shall be considered to be
     continuously  prosecuted  if not more than  ninety  (90) days shall  elapse
     between the  completion  or  abandonment  of one well and the  beginning of
     operations for the drilling of a subsequent well. If after discovery of oil
     or gas on said land or on acreage pooled therewith,  the production thereof
     should  cease from any cause after the primary  term,  this lease shall not
     terminate if Lessee commences additional drilling or re-working  operations
     within  ninety (90) days from date of cessation of  production or from date
     of completion  of dry hole. If oil or gas shall be discovered  and produced
     as a result of such  operations  at or after the  expiration of the primary
     term of this lease,  this lease  shall  continue in force so long as oil or
     gas is produced from the leased premises or on acreage pooled therewith.

2.   This is a PAID-UP LEASE. In consideration of the down cash payment,  Lessor
     agrees that Lessee shall not be  obligated,  except as  otherwise  provided
     herein,  to commence or continue any  operations  during the primary  term.
     Lessee may at any time or times during or after the primary term  surrender
     this  lease as to all or any  portion  of said land and as to any strata or
     stratum  by  delivering  to  Lessor or by filing  for  record a release  or
     releases,  and be relieved of all obligation  thereafter accruing as to the
     acreage surrendered.

3.   In consideration of the premises the said Lessee covenants and agrees:

     1st. To deliver to the credit of Lessor,  free of cost, in the pipe line to
          which  Lessee may  connect  wells on said land,  the equal  one-eighth
          (1/8) part of all oil produced and saved from the leased premises.

     2nd. To pay Lessor  one-eighth  (1/8) of the net  proceeds at the well from
          the  proceeds  received  for gas sold from each well where gas only is
          found,  or the  market  value  at the  well of such  gas  used off the
          premises.

     3rd. To pay Lessor one-eighth (1/8) of the market value at the well for gas
          produced  from any oil well  and  used  off the  premises,  or for the
          manufacture of casing-head gasoline or dry commercial gas.

     4th. To pay Lessor  one-eighth (1/8) of the proceeds received from the sale
          of any substance covered by this lease, other than oil and gas and the
          products thereof,  which Lessee may elect to produce, save, and market
          from the leased premises.

4.   Where gas from a well capable of producing gas is not sold or used,  Lessee
     may pay or tender as royalty to the royalty  owners One Dollar per year per
     net royalty acre retained  hereunder,  such payment or tender to be made on
     or  before  the  anniversary  date of this  lease  next  ensuing  after the
     expiration of 90 days from the date such well is shut in and  thereafter on
     or before the anniversary date of this lease during the period such well is
     shut in. If such payment or tender is made, it will be considered  that gas
     is being produced within the meaning of this lease.

5.   If said Lessor owns a less  interest in the above  described  land than the
     entire  and  undivided  fee  simple  estate  therein,  then  the  royalties
     (including any shut-in gas royalty)  herein  provided for shall be paid the
     Lessor only in the proportion  which  Lessor's  interest bears to the whole
     and undivided fee.

6.   Lessee  shall  have the  right to use,  free of cost,  gas,  oil and  water
     produced on said land for Lessee's operation thereon, except water from the
     wells of Lessor.

7.   When  requested by Lessor,  Lessee shall bury Lessee's pipe line below plow
     depth.

8.   No well shall be drilled  nearer  than 200 feet to the house or barn now on
     said premises without written consent of Lessor.

9.   Lessee shall pay for damages caused by Lessee's operations to growing crops
     on said land.

10.  Lessee  shall  have the  right  at any time to  remove  all  machinery  and
     fixtures  placed on said  premises,  including the right to draw and remove
     casing.

11.  The rights of Lessor and Lessee hereunder may be assigned in whole or part.
     No change in ownership of Lessor's  interest (by  assignment  or otherwise)
     shall be binding on Lessee  until  Lessee has been  furnished  with notice,
     consisting of certified copies of all recorded instruments or documents and
     other  information  necessary to establish a complete chain of record title
     from Lessor,  and then only with respect to payments  thereafter  made.  No
     other kind of notice,  whether actual or constructive,  shall be binding on
     Lessee. No present or future division of Lessor's ownership as to different
     portions or parcels of said land shall  operate to enlarge the  obligations
     or  diminish  the  rights of Lessee,  and all  Lessee's  operations  may be
     conducted  without regard to any such division.  If all or any part of this
     lease is  assigned,  no  leasehold  owner  shall be  liable  for any act or
     omission of any other leasehold owner.

12.  Lessee,  at its option, is hereby given the right and power at any time and
     from time to time as a recurring right,  either before or after production,
     as to all or any part of the  land  described  herein  and as to any one or
     more of the formations  hereunder,  to pool or unitize the leasehold estate
     and the  mineral  estate  covered by this lease with other  land,  lease or
     leases in the  immediate  vicinity  for the  production  of oil and gas, or
     separately  for the production of either,  when in Lessee's  judgment it is
     necessary  or  advisable to do so, and  irrespective  of whether  authority
     similar to this  exists with  respect to such other land,  lease or leases.
     Likewise,  units previously formed to include  formations not producing oil
     or gas,  may be  reformed to exclude  such  non-producing  formations.  The
     forming or reforming of any unit shall be accomplished by Lessee  executing
     and filing of record a  declaration  of such  unitization  or  reformation,
     which  declaration  shall describe the unit. Any unit may include land upon
     which a well has  theretofore  been completed or upon which  operations for
     drilling  have   theretofore  been  commenced.   Production,   drilling  or
     re-working  operations or a well shut in for want of a market anywhere on a
     unit which  includes  all or a part of this lease shall be treated as if it
     were production,  drilling,  or re-working operations or a well shut in for
     want of a market  under  this  lease.  In lieu of the  royalties  elsewhere
     herein specified,  including shut-in gas royalties, Lessor shall receive on
     production  from the unit so pooled  royalties  only on the portion of such
     production   allocated  to  this  lease;  such  allocation  shall  be  that
     proportion  of the unit  production  that the total number of surface acres
     covered by this lease and included in the unit bears to the total number of
     surface acres in such unit. In addition to the foregoing, Lessee shall have
     the  right to  unitize,  pool,  or  combine  all or any  part of the  above
     described  lands as to one or more of the formations  thereunder with other
     lands in the same general area by entering into a cooperative  or unit plan
     of development  or operation  approved by any  governmental  authority and,
     from time to time, with like approval,  to modify,  change or terminate any
     such plan or  agreement  and,  in such  event,  the terms,  conditions  and
     provisions of this lease shall be deemed  modified to conform to the terms,
     conditions,  and  provisions of such approved  cooperative  or unit plan of
     development or operation and,  particularly,  all drilling and  development
     requirements  of this lease,  express or  implied,  shall be  satisfied  by
     compliance with the drilling and  development  requirements of such plan or
     agreement,  and this lease shall not terminate or expire during the life of
     such plan or agreement. In the event that said above described lands or any
     part thereof,  shall  hereafter be operated  under any such  cooperative or
     unit plan of development or operation  whereby the production  therefrom is
     allocated to different  portions of the land covered by said plan, then the
     production allocated to any particular tract of land shall, for the purpose
     of computing the royalties to be paid  hereunder to Lessor,  be regarded as
     having  been  produced  from  the  particular  tract of land to which it is
     allocated and not to any other tract of land;  and the royalty  payments to
     be made  hereunder  to Lessor  shall be based  upon  production  only as so
     allocated.   Lessor  shall  formally   express   Lessor's  consent  to  any
     cooperative or unit plan of development or operation  adopted by Lessee and
     approved by any  governmental  agency by executing the same upon request of
     Lessee.

13.  All  express or  implied  covenants  of this lease  shall be subject to all
     Federal and State Laws,  Executive Orders,  Rules or Regulations,  and this
     lease shall not be terminated,  in whole or in part, nor Lessee held liable
     in damages, for failure to comply therewith, if compliance is prevented by,
     or if  such  failure  is the  result  of,  any  such  Law,  Order,  Rule or
     Regulation.

                                       G-1
<PAGE>

14.  Lessor  hereby  warrants and agrees to defend the title to the lands herein
     described,  and agrees that the Lessee  shall have the right at any time to
     redeem for Lessor, by payment,  any mortgages,  taxes or other liens on the
     above described  lands, in the event of default of payment by Lessor and be
     subrogated  to the rights of the holder  thereof,  and Lessor hereby agrees
     that any such  payments  made by Lessee for the Lessor may be deducted from
     any  amounts of money  which may  become due the Lessor  under the terms of
     this lease.  The  undersigned  Lessors,  for  themselves  and their  heirs,
     successors and assigns, hereby surrender and release all right of dower and
     homestead in the premises described herein,  insofar as said right of dower
     and  homestead  may in any way affect the  purposes for which this lease is
     made, as recited herein.

15.  Should any one or more of the parties  hereinabove  named as Lessor fail to
     execute this Lease, it shall  nevertheless be binding upon all such parties
     who do execute  it as Lessor.  The word  "Lessor",  as used in this  lease,
     shall mean any one or more or all of the parties who execute  this lease as
     Lessor.  All the  provisions  of this lease  shall be binding on the heirs,
     successors and assigns of Lessor and Lessee.

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

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

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

--------------------------
SS/Tax ID#

STATE of                                              ACKNOWLEDGEMENT-INDIVIDUAL
         ----------------------------

COUNTY of
           ----------------------------

BEFORE ME, the undersigned,  a Notary Public,  in and for said County and State,
on this____day of ___________________, 200____, personally appeared ___________,
_________________ identical  person__________  ,  described in and who executed
the within and foregoing instrument of writing and acknowledged to me that ___
he____ duly  executed  same as_______ free and voluntary act and deed for the
uses and  purposes  therein  set forth and in the capacity stated therein.

      IN WITNESS  WHEREOF,  I have  hereunto set my hand and affixed my notarial
seal the day and year last above written.

My Commission Expires:______________________

                                                ________________________________
                                                   Notary
                                                   Public:
                                                   Address:

STATE of                                              ACKNOWLEDGEMENT-INDIVIDUAL
         ----------------------------

COUNTY of
           ----------------------------

BEFORE ME, the undersigned,  a Notary Public,  in and for said County and State,
on this____day of ___________________, 200____, personally appeared ___________,
_________________ identical  person__________  ,  described in and who executed
the within and foregoing instrument of writing and acknowledged to me that ___
he____ duly  executed  same as_______ free and voluntary act and deed for the
uses and  purposes  therein  set forth and in the capacity stated therein.

      IN WITNESS  WHEREOF,  I have  hereunto set my hand and affixed my notarial
seal the day and year last above written.

My Commission Expires:______________________

                                                ________________________________
                                                   Notary
                                                   Public:
                                                   Address:

STATE of                                               ACKNOWLEDGEMENT-CORPORATE
         ----------------------------

COUNTY of
           ----------------------------

BEFORE ME, the undersigned,  a Notary Public,  in and for said County and State,
on this____day of ___________________, 200____, personally appeared ___________,
_________________ identical  person__________  ,  described in and who executed
the within and foregoing instrument of writing and acknowledged to me that ___
he____ duly  executed  same as_______ free and voluntary act and deed of such
corporation by authority of its Board of Directors for the uses and  purposes
therein  set forth and in the capacity stated therein.

      IN WITNESS  WHEREOF,  I have  hereunto set my hand and affixed my notarial
seal the day and year last above written.

My Commission Expires:______________________

                                                ________________________________
                                                   Notary
                                                   Public:
                                                   Address:

                                       G-2
<PAGE>

                                   EXHIBIT "H"

ATTACHED  HERETO AND MADE A PART HEREOF THAT CERTAIN  OPERATING  AGREEMENT DATED
FEBRUARY 28, 2003,  COVERING THE FLY CREEK  PROSPECT,  LOCATED IN MOFFAT COUNTY,
COLORADO, AND CARBON COUNTY WYOMING

     THIS AGREEMENT, entered into by and between        CEDAR RIDGE LLC
                                                     ---------------------------
Herein after referred to as "Operator", and the signatory party or parties other
than Operator,  hereinafter  referred to  individually  as  "Non-Operator",  and
collectively as "Non-Operators".

     WHEREAS,  the  parties to this  agreement  are owners of Oil and Gas leases
and/or Oil and Gas  Interests in the land  identified in Exhibit "A" (said land,
Leases and Interests being  hereinafter  called the "Contract  Area", and in any
instance  in which the Leases or  Interests  of a party are not of  record,  the
record owner and the party  hereto that owns the interest or rights  therein are
reflected on Exhibit "A",

     WHEREAS,  the parties  hereto have  executed an Operating  Agreement  dated
FEBRUARY 28, 2003 (herein the "Operating  Agreement") covering the Contract Area
for the purpose of exploring and developing such lands, Leases and Interests for
Oil and Gas; and

     WHEREAS, the parties hereto have executed this agreement for the purpose of
inparting  notice to all  persons of the rights and  obligations  of the parties
under the Operating  Agreement and for the further  purpose of perfecting  those
rights capable of perfection.

     NOW,  THEREFORE,  in  consideration of the mutual rights and obligations of
the parties hereto, it is agreed as follows:

1.   This agreement supplements the Operating Agreement,  which Agreement in its
     entirety is  incorporated  herein by  reference,  and all terms used herein
     shall have the meaning ascribed to them in the Operating Agreement.

2.   The parties do hereby agree that:

     A.   The Oil and Gas Leases  and/or Oil and Gas  interests  of the  parties
          comprising the Contract Area shall be subject to and burdened with the
          terms and  provisions of this  agreement and the Operating  Agreement,
          and the parties do hereby  commit and such Leases and Interests to the
          performance thereof.

     B.   The  exploration  and development of the Contract Area for Oil and Gas
          shall  be  governed  by the  terms  and  provisions  of the  Operating
          Agreement, as supplemented by this agreement.

     C.   All costs and liabilities  incurred in operations under this agreement
          and the Operating Agreement shall be borne and paid, and all equipment
          and  materials  acquired in  operations  on the Contract Area shall be
          owned, by the parties hereto, as provided in the Operating Agreement.

     D.   Regardless  of the record  title  ownership  to the Oil and Gas Leases
          and/or Oil and Gas Interests identified on Exhibit "A", all production
          of Oil and Gas from the Contract Area shall be owned by the parties as
          provided in the Operating  Agreement,  provided  nothing  contained in
          this  agreement  shall be deemed an assignment or cross  assignment of
          interests covered hereby.

     E.   Each party shall pay or deliver, or cause to be paid or delivered, all
          burdens  on its  share of the  production  from the  Contract  Area as
          provided in the Operating Agreement.

     F.   An overriding  royalty,  production  payment,  net profits interest or
          other burden payable out of production  hereafter created,  assignment
          of  production  given as  security  for the payment of money and those
          overriding  royalties,  production  payments and other burdens payable
          out of  production  heretofore  created  and  defined as  Subsequently
          Created Interests in the Operating Agreement shall be (i) borne solely
          by the party whose  interest is burdened  therewith,  (ii)  subject to
          suspension  if a party is required to assign or  relinquish to another
          party an interest  which is subject to such burden,  and (iii) subject
          to the lien and security  interest  hereinafter  provided if the party
          subject to such burden  fails to pay its share of expenses  chargeable
          hereunder  and under the Operating  Agreement,  all upon the terms and
          provisions  and in the  times and  manner  provided  by the  Operating
          Agreement.

     G.   The Oil and Gas Leases and/or Oil and Gas Interests  which are subject
          hereto may not be assigned or  transferred  except in accordance  with
          those terms,  provisions and  restrictions in the Operating  Agreement
          regulating such transfers.  This agreement and the Operating Agreement
          shall be binding  upon and shall  inure to the  benefit of the parties
          hereto, and their respective heirs,  devisees,  legal representatives,
          and  assigns,  and the  terms  hereof  shall be deemed to run with the
          leases or interests included within the lease Contract Area.

     H.   The  parties  shall have the right to acquire an  interest in renewal,
          extension and replacement  leases  proposed to be  surrendered,  wells
          proposed to be abandoned, and interests to be relinquished as a result
          of nonparticipation in subsequent  operations,  all in accordance with
          the terms and provisions of the Operating Agreement.

     I.   The  rights and  obligations  of the  parties  and the  adjustment  of
          interests among them in the event of a failure or loss of title,  each
          party's  right to  propose  operations,  obligations  with  respect to
          participation  in operations on the Contract Area and the consequences
          of a failure to participate in operations,  the rights and obligations
          of the parties  regarding the marketing of production,  and the rights
          and  remedies of the  parties  for  failure to comply  with  financial
          obligations shall be as provided in the Operating Agreement.

     J.   Each party's  interest  under this  agreement  and under the Operating
          Agreement  shall be  subject  to  relinquishment  for its  failure  to
          participate  in  subsequent  operations  and  each  party's  share  of
          production  and  costs  shall  be  reallocated  on the  basis  of such
          relinquishment,  all upon the terms  and  provisions  provided  in the
          Operating Agreement.

     K.   All other matters with respect to exploration  and  development of the
          Contract Area and the ownership and transfer of the Oil and Gas Leases
          and/or Oil and Gas Interest therein shall be governed by the terms and
          provisions of the Operating Agreement

3.   The  parties  hereby  grant  reciprocal  liens and  security  interests  as
     follows:

     A.   Each party grants to the other parties hereto a lien upon any interest
          it now owns or  hereafter  acquires  in Oil and Gas Leases and Oil and
          Gas Interests in the Contract  Area,  and a security  interest  and/or
          purchase  money  security  interest  in any  interest  it now  owns or
          hereafter acquires in the personal property and fixtures on or used or
          obtained for use in connection therewith, to secure performance of all
          of its  obligations  under this agreement and the Operating  Agreement
          including  but not limited to payment of expense,  interest  and fees,
          the proper  disbursement  of all monies paid under this  agreement and
          the Operating Agreement,  the assignment or relinquishment of interest
          in Oil and  Gas  Leases  as  required  under  this  agreement  and the
          Operating  Agreement,  and the proper  performance of operations under
          this  agreement  and the Operating  Agreement.  Such lien and security
          interest  granted by each party  hereto  shall  include  such  party's
          leasehold interests, working interests,  operating rights, and royalty
          and  overriding  royalty  interests in the Contract  Area now owned or
          hereafter  acquired  and in lands  pooled  or  unitized  therewith  or
          otherwise  becoming  subject  to  this  agreement  and  the  Operating
          Agreement,  the Oil and Gas when  extracted  therefrom  and  equipment
          situated thereon or used or obtained for use in connections  therewith
          (including without  limitation,  all wells, tools, and tubular goods),
          and accounts (including, without limitation, accounts arising from the
          sale of production at the wellhead),  contract  rights,  inventory and
          general  intangibles  relating  thereto or arising  therefrom  and all
          proceeds and products of the foregoing.

                                       H-2
<PAGE>

     B.   Each party  represents  and warrants to the other parties  hereto that
          the lien and  security  interest  granted  by such  party to the other
          parties shall be a first and prior lien,  and each party hereby agrees
          to maintain the priority of said lien and  security  interest  against
          all persons  acquiring an interest in Oil and Gas Leases and Interests
          covered by this  agreement and the Operating  Agreement by, through or
          under such  party.  All parties  acquiring  an interest in Oil and Gas
          Leases and Oil and Gas  Interests  covered by this  agreement  and the
          Operating  Agreement,   whether  by  assignment,   merger,   mortgage,
          operation of law, or otherwise,  shall be deemed to have taken subject
          to the lien and security  interest granted by the Operating  Agreement
          and  this  instrument  as to  all  obligations  attributable  to  such
          interest under this agreement and the Operating  Agreement  whether or
          not such obligations arise before or after such interest is acquired.

     C.   To the extent  that the  parties  have a security  interest  under the
          Uniform  Commercial  Code of the state in which the  Contract  Area is
          situated,  they should be entitled to exercise the rights and remedies
          of a secured  party  under the Code.  The  bringing  of a suit and the
          obtaining  of judgment by a party for the secured  indebtedness  shall
          not be deemed an election of  remedies  or  otherwise  affect the lien
          rights or security  interest as security for the payment  thereof.  In
          addition,  upon  default  by any party in the  payment of its share of
          expenses,  interest or fees,  or upon the improper use of funds by the
          Operator, the other parties shall have the right, without prejudice to
          other  rights or remedies to collect from the  purchaser  the proceeds
          from the sale of such  defaulting  party's  share of Oil and Gas until
          the amount owed by such party, plus interest,  has been received,  and
          shall have the right to offset the amount owed  against  the  proceeds
          from the sale of such  defaulting  party's  share of Oil and Gas.  All
          purchasers of production  may rely on a  notification  of default from
          the non-defaulting party or parties stating the amount due as a result
          of the default,  and all parties waive any resource  available against
          purchasers  fro  releasing  production  proceeds  as  provided in this
          paragraph.

     D.   If any party  fails to pay its share of  expense  within  one  hundred
          twenty  (120)  days  after  rendition  of  a  statement  therefore  by
          Operator, the non-defaulting parties,  including Operator, shall, upon
          request by  Operator,  pay the unpaid  amount in the portion  that the
          interest of each such party bears to the interest of all such parties.
          The amount paid by each party so paying its share of the unpaid amount
          shall be secured by the liens and  security  rights  described in this
          paragraph 3 and in the Operating Agreement,  and each paying party may
          independently   pursue  any  remedy   available  under  the  Operating
          Agreement or otherwise.

     E.   If any  party  does not  perform  all of its  obligations  under  this
          agreement  or the  Operating  Agreement,  and the  failure  to perform
          subjects such party to foreclosure or execution proceeding pursuant to
          the  provisions of this agreement or the Operating  Agreement,  to the
          extent  allowed by  governing  law,  the  defaulting  party waives any
          available right of redemption from and after the date of judgment, any
          required  valuation  or  appraisement  of  the  mortgaged  or  secured
          property  prior to sale,  any available  right to stay execution or to
          require a marshalling  of assets and any requir3ed bond in the event a
          receiver  is  appointed.  In  addition,  to the  extent  permitted  by
          applicable  law, each party hereby grants to the other parties a power
          of sale as to any  property  that is subject to the lien and  security
          rights granted hereunder or under the Operating Agreement,  such power
          to be exercised in the manner  provided by applicable law or otherwise
          in a commercially reasonable manner and upon reasonable notice.

     F.   The lien and security interest granted by this paragraph 3 supplements
          rights  granted  under  the  Operating  Agreement.  G.  To the  extent
          permitted by applicable law, Non-Operators agree that the Operator may
          invoke or utilize  the  mechanics'  or  materialmen's  lien law of the
          state in which the  Contract  Area is  situated in order to secure the
          payment  to  Operator  of any sum due  under  this  agreement  and the
          Operating  Agreement for services  performed or materials  supplied by
          Operator.

     H.   The above  described  security will be financed at the wellhead of the
          well  or  wells  located  on the  Contract  Area  and  this  Recording
          Supplement may be filed in the land records in the County or Parish in
          which the Contract  Area is located,  and as a financing  statement in
          all recording  offices  required under the Uniform  Commercial Code or
          other  applicable  state  statutes  to  perfect  the  above  described
          security  interest,  and any  party  hereto  may  file a  continuation
          statement as necessary  under the Uniform  Commercial  Code,  or other
          state laws.

4.   This agreement shall be effective as of the date of the Operating Agreement
     as above  recited.  Upon  termination  of this  agreement and the Operating
     Agreement and the satisfaction of all obligations  thereunder,  Operator is
     authorized to file of record in all necessary recording offices a notice of
     termination,  and each  party  hereto  agrees to  execute  such a notice of
     termination  as to Operator's  interest,  upon the request of Operator,  if
     Operator has complied with all of its financial obligations.

5.   This agreement and the Operating  Agreement shall be binding upon and shall
     inure to the  benefit of the  parties  hereto and their  respective  heirs,
     devisees,   legal   representatives,   successors  and  assigns.  No  sale,
     encumbrance,  transfer or other  disposition  shall be made by any party of
     any interest in the Leases or Interests  subject hereto except as expressly
     permitted  under the Operating  Agreement and, if permitted,  shall be made
     expressly subject to this agreement and the Operating Agreement and without
     prejudice to the rights of the other parties. If the transfer is permitted,
     the  assignee  of an  ownership  interest in any Oil and Gas Lease shall be
     deemed a party to this  agreement  and the  Operating  Agreement  as to the
     interest  assigned  from and after the  effective  date of the  transfer of
     ownership;  provided, however, that the other parties shall not be required
     to recognize any such sale, encumbrance,  transfer or other disposition for
     any purpose  hereunder  until  thirty (30) days after they have  received a
     copy of the instrument of transfer or other  satisfactory  evidence thereof
     in writing  from the  transferor  or  transferee.  No  assignment  or other
     disposition  of interest by a party shall relieve such party of obligations
     previously  incurred by such party under this  agreement  or the  Operating
     Agreement  with  respect to the  interest  transferred,  including  without
     limitation  the obligation of a party to pay all costs  attributable  to an
     operation  conducted  under this  agreement and the Operating  Agreement in
     which such party has agreed to participate prior to making such assignment,
     and the lien  and  security  interest  granted  by  Article  VII.B.  of the
     Operating  Agreement  and hereby  shall  continue  to burden  the  interest
     transferred to secure payment of any such obligations.

6.   In the  event of a  conflict  between  the  terms  and  provisions  of this
     agreement and the terms and provisions of the Operating Agreement, then, as
     between the parties,  the terms and  provisions of the Operating  Agreement
     shall control.

7.   This agreement shall be binding upon each  Non-Operator when this agreement
     or a  counterpart  thereof  has  been  executed  by such  Non-Operator  and
     Operator  notwithstanding  that this  agreement  is not then or  thereafter
     executed  by all of the parties to which it is tendered or which are listed
     on Exhibit "A" as owning an interest in the Contract  Area or which own, in
     fact,  an interest in the Contract  Area.  In the event that any  provision
     herein is illegal or unenforceable,  the remaining  provisions shall not be
     affected,  and  shall  be  enforced  as if  the  illegal  or  unenforceable
     provision did not appear herein.

8.   In  the  event  there  is  a  conflict   between  this  Agreement  and  the
     Participation  Agreement dated March 24, 2003, the Participation  Agreement
     will prevail.

     IN WITNESS WHEREOF, this agreement shall be effective as of the 28TH day of
FEBRUARY, 2003.

     OPERATOR:

     CEDAR RIDGE LLC

                                       H-2
<PAGE>

     /s/ TERRY L. LOGAN
     -------------------------------
     TERRY L. LOGAN, MANAGER

     NON-OPERATORS:

     SKYLINE RESOURCES, INC.

     /s/ JUBAL S. TERRY
     -------------------------------
     JUBAL S. TERRY, PRESIDENT/CEO

     SLATERDOME GAS, INC.

     By:
          ----------------------------------

     Title:
           ---------------------------------

                                       H-3Exhibit 10.3

                                 March 24, 2003

Mr. Jubal S. Terry President/CEO Skyline Resources, Inc.
3000 Youngfield #338
Lakewood, Colorado 80215
Phone:   303-238-8712
Fax:     303-238-3190
email:   SKYLINERes@msn.com

Participation Agreement
Fly Creek Prospect (Coal Bank Draw & Slater Dome)
Moffat County, Colorado and Carbon County, Wyoming

Gentlemen:

     Skyline  Resources,   Inc.  (hereinafter  referred  to  as  "Skyline")  has
previously acquired leasehold interests in and to certain oil and gas leases, as
well  as  some  mineral  fee  interest,  covering  approximately  16,000  acres,
(hereinafter  referred to as the  "Prospect  Area")  that are more  particularly
described in those leases (the "Leases")  listed in Exhibit "A" attached  hereto
and made a part hereof.  Such interest shall be from the surface of the Earth to
the base of the Mesa Verde Formation.  Cedar Ridge, L.L.C. (hereinafter referred
to as "Cedar  Ridge"),  has agreed to acquire a Thirty-Six  and  666667/10000000
percent  (36.666667%)  working  interest in the Prospect Area in accordance with
the terms and conditions of this agreement (the "Agreement"), the attachments to
this Agreement, and the Purchase and Sale Agreement dated February 17, 2003.

     This Agreement,  together with all exhibits attached hereto and made a part
hereof shall confirm and set forth the  understanding  of, and agreement to, the
terms  and  conditions  whereby  Cedar  Ridge  shall  acquire  the  right  to an
assignment of a Thirty-Six and 666667/10000000  percent  (36.666667%)  undivided
working interest in and to interests in the form of leasehold interests.

                                       I.
              CONSIDERATION, ASSIGNMENT AND AREA OF MUTUAL INTEREST
              -----------------------------------------------------

1.1   At the time that Cedar Ridge and Skyline entered into the Letter of Intent
dated January 14, 2003,  Cedar Ridge  tendered to Skyline  Twenty-Five  Thousand
Dollars  ($25,000.00)  as an up front payment of a portion of the total purchase
price.  Cedar Ridge will,  upon execution of this  Agreement,  pay Skyline Three
Hundred Seventy-Five Thousand Dollars ($375,000.00), (hereinafter referred to as
the  "Acquisition  Price  Balance")  as  payment  in full for a  Thirty-Six  and
666667/100000  percent  (36.666667%)  of 8/8ths  working  interest in the Leases
within  the  Prospect  Area as  shown  on  Exhibit  "B".  Skyline  shall  retain
30.000000% of 8/8ths in the Prospect. As additional  consideration,  Cedar Ridge
shall pay on behalf of Skyline its retained  30.000000%  share of costs  through
the first $500,000.00 of Skyline's  proportionate  share of all costs. Thus, the
total  amount  of  consideration  for paid by  Cedar  Ridge  for its  36.666667%
interest in the Prospect is Nine Hundred Thousand Dollars  ($900,000.00)  (i.e.,
$25,000.00 + $375,000.00 + $500,000.00). In the event that Cedar Ridge, at Cedar
Ridge's sole discretion, does not invest in the Prospect Area its own 36.666667%
share of future funding  requirements plus funding on behalf of Skyline equal to
the  entire  $500,000  "carry"  so that  Skyline  has not  received  the  entire
$900,000.00 consideration to be paid for Cedar Ridge's interest in the Prospect,
then  Cedar  Ridge will earn a  proportionate  share of the  36.666667%  working
interest, which shall be in the proportion that the sum of (a) the $400,000 paid
on or before the date of this Agreement, plus (b) the actual dollars invested by
Cedar Ridge on behalf of Skyline  pursuant to the  "carry",  bear to the maximum
investment of $900,000.00 (e.g.,  $400,000/$900,000 = 44.444444% of 36.666667% =
Cedar Ridge "earned" working interest of 16.30%).

1.2    Upon receipt of the  Acquisition Price Balance, Skyline shall immediately
make  assignment  to Cedar Ridge of an undivided  thirty-six  and  66667/1000000
percent  (36.666667%)  of 8/8ths working  interest in and to the Leases covering
the  Prospect  Area  acreage  as  identified  on  Exhibit  "A"  under  a form of
assignment and bill of sale mutually agreeable to both parties,  with all leases
being delivered at an eighty percent (80%) net revenue interest  proportionately
reduced to Cedar Ridge's  working  interest.  It is understood that eight (8) of
the leases are  burdened  by a royalty in excess of twenty  percent  (20%),  and
those  particular  leases are  accepted  by Cedar  Ridge at a lower net  revenue
interest.  Those  particular  leases are shown on Exhibit "AA". It is understood
that the Leases  assigned to Cedar Ridge do not have any  burdens  imposed  upon
them by Skyline or any of Skyline's affiliates  (affiliate being any entity that
has a 5% or more  interest  in  Skyline  or in  which  Skyline  has a 5% or more
interest.  No party to this  Agreement  is to retain an  override  or impose any
additional burdens on any new acreage acquired.  Any and all existing Overriding
Royalty  Interests  are set forth in those  contracts set forth on Exhibit "A2".
Included with the Acquisition Price Balance is a 36.666667%  working interest in
the nine (9) existing wells, and associated  production and disposal  equipment,
as set forth on Exhibit  "A1",  subject to  adjustment  under Article 1.1 if the
full $500,000 "carry" is not paid by Cedar Ridge on behalf of Skyline.

Page 1 of 4

<PAGE>

1.3 The black  outlined area on the plat attached  hereto and made a part hereof
as  Exhibit  "B"  shall  be  hereinafter  referred  to as the  "Area  of  Mutual
Interest," or "AMI" for the Fly Creek Prospect. Cedar Ridge shall be entitled to
its proportionate  share of any additional  acreage acquired within the Prospect
Area as  provided in this  Article  1.3. It is  understood  by the parties  that
Skyline  is  unable to  deliver  all of the  acreage  indicated  in its  initial
negotiations with Cedar Ridge. As a result, Skyline has agreed to acquire at its
sole cost and expense the leasehold described on Exhibit "AB", and to deliver to
Cedar Ridge its 36.666667%  proportionate share of such newly-acquired leasehold
working  interest in these  leases  within  thirty (30) days of closing.  In the
event that Skyline  fails to acquire the leases set forth on Exhibit "AB" within
the time  period  provided,  then Cedar  Ridge  shall have the option to acquire
these  interests  and be  credited  with all of the  lease  costs  and  expenses
(including,  but not limited to,  brokerage  costs,  recording  fees,  and lease
bonus)  incurred  to  acquire  these  interests  against  the  $500,000  "carry"
described herein. All other leasehold  acquisitions  within said AMI in addition
of the leasehold  interests described in Exhibit "AB" that are to be acquired by
Skyline at its sole cost and  expense,  shall be governed by the  provisions  of
Article XV.10. of the Joint Operating Agreement attached as Exhibit "C".

1.4 The  assignment of interests in the Leases will be subject to the provisions
contained  in the  respective  leases  only and the  Joint  Operating  Agreement
attached  hereto as Exhibit "C";  provided that the parties agree that until the
$500,000  "carry" has been satisfied,  Skyline shall be deemed to have given its
consent to a proposed operation solely by notifying Cedar Ridge it consents, and
Skyline  shall  have no  obligation  to comply  with  Article  XV.5 of the Joint
Operating Agreement.

1.5  Cedar  Ridge   understands  that  Skyline  is  currently   negotiating  the
acquisition of additional  leasehold interest in the Prospect Area that includes
all rights in approximately  8,900 acres adjacent to the existing Leases and the
deeper  Niobrara  rights on the  existing  Leases  separate  and apart  from the
acreage  described  in Exhibit  "AB".  The parties  agree that Cedar Ridge shall
supervise the additional leasehold  acquisitions  (outside of those described in
Article  1.3 as being  acquired  at the sole  expense  of  Skyline)  within  the
Prospect Area, and that such  acquisitions  shall be on a "heads-up"  basis with
each party bearing its  proportionate  share of the acquisition  costs,  and all
interests acquired will be delivered as received (i.e., no additional overriding
royalty interest shall be added).

                                       II.
                 TERMS FOR OPERATIONS, INVESTMENT, AND PIPELINE
                 ----------------------------------------------

2.1  Skyline  and Cedar  Ridge agree that all  drilling  and  operations  on the
Prospect Area will be governed by the terms and conditions of the A.A.P.L.  Form
610-1982 Model Form  Operating  Agreement,  as modified,  and COPAS 1984 Onshore
Accounting  Procedure Joint Operations  (said A.A.P.L.  Form 610-1982 Model Form
Operating   Agreement,   and  COPAS  1984  Onshore  Accounting  Procedure  Joint
Operations  is  attached  hereto  and will be  collectively  referred  to as the
"Operating  Agreement") which is attached hereto as Exhibit "C", and names Cedar
Ridge, L.L.C. as Operator. Skyline is currently subject to one or more operating
agreement(s),  and  Skyline by its  execution  of this  Participation  Agreement
hereby agrees to have any and all other affected  parties elect to terminate the
existing  operating  agreement(s)  and acknowledge  that they are subject to the
Operating Agreement's terms and conditions as of the Closing Date. Additionally,
Skyline  hereby  confirms  that  the  termination  of  the  existing   operating
agreement(s) and execution of the Operating Agreement shall not adversely affect
Cedar Ridge in any manner.

2.2 In the event that Cedar Ridge, in its sole  discretion,  determines that the
development of the Prospect Area is not progressing to its  satisfaction  before
Cedar Ridge completes its entire investment in the Prospect Area (i.e. inclusive
of the time in which  Cedar  Ridge  has  "carried"  Skyline  for its  30.000000%
working  interest  through the expenditure on behalf of Skyline of $500,000.00),
then Cedar Ridge has the option to discontinue payments under the "carry" as set
forth above.  In this event,  Cedar Ridge shall earn a  proportionately  reduced
working  interest  in the  Prospect  Area,  based  upon  its  actual  amount  of
investment  as set forth in Article  1.1 above.  In such an event,  Cedar  Ridge
shall  promptly  re-assign to Skyline the working  interest in the Prospect Area
not earned by Cedar Ridge pursuant to Article 1.1, which  assignment shall be in
the same form,  including  warranties,  as the assignment  from Skyline to Cedar
Ridge,  and shall be free of any additional  burdens over those contained in the
assignment from Skyline to Cedar Ridge.

2.3 Skyline has secured the investment capital to build a sixteen-mile  pipeline
from the Prospect Area to Baggs,  WY.  Skyline  agrees that Cedar Ridge shall be
entitled to participate in and own its proportionate  share, being 36.666667% of
8/8ths of the  pipeline  and thereby  have  control of its ability to market its
working interest share of gas and other products.

Page 2 of 4

<PAGE>

                                      III.
                                     NOTICES

3.1   Any notice or information required to be furnished  hereunder  shall be in
writing or by fax and given to the following parties:

CEDAR RIDGE:                                SKYLINE:
Cedar Ridge, L.L.C.                         Skyline Resources, Inc.
484 Turner Drive                            3000 Youngfield
Building B                                  Suite 338
PO Box 3524                                 Lakewood, CO  80215
Durango, CO  81302-3524                     Attention: Mr. Jubal S. Terry
Attention: Mr. Terry Logan                  Office:    303-238-8712
Office:  970-382-5990                       FAX:       303-238-3190
FAX:     970-382-9820

3.2 Skyline and Cedar  Ridge  shall have the right to change  their  address for
notices by giving written notice of such change to the other party.

                                       IV.
                                  GENERAL TERMS
                                  -------------

4.1 This Agreement and all operations  conducted on the AMI and the Leases shall
be subject to all valid and applicable  laws,  orders,  rules and regulations of
any governmental body having jurisdiction over such operations.  The obligations
of  the  parties  hereunder  are  intended  to be  separate  and  not  joint  or
collective,  and nothing in this  Agreement or any act by Skyline or Cedar Ridge
shall ever be construed or implied as creating a mining partnership,  commercial
partnership,  or other  partnership  relation;  it being  the  intention  of the
parties  hereto not to create,  and this  Agreement  shall never be construed to
create, a mining or other partnership or joint venture.

4.2 Each party's  obligations  as set out in this  Agreement are several and not
joint and each party shall be  individually  responsible for its own obligations
as set out in this Agreement and in the Operating Agreement.

4.3 This Agreement shall inure to the benefit of and be binding upon Skyline and
Cedar  Ridge  and  their  successors  and  assigns;  and  this  Agreement  shall
constitute  a covenant  running  with the  Leases,  and any  additional  mineral
interests acquired under the terms of the AMI.

4.4 This Agreement and the interest in the Leases and/or Fee Interests  assigned
to Cedar Ridge  pursuant to this  Agreement may be assigned or  transferred,  in
whole or in part,  without  the prior  written  consent  of  Skyline;  provided,
however,  that in such event Cedar Ridge shall remain liable for the performance
of its obligations under this Agreement,  the Exhibits attached hereto,  and all
other  documents  executed  at  closing,  and  further  provided  that  any such
assignment  shall  nevertheless  be void unless it is made expressly  subject to
this Agreement.  Likewise, this Agreement and the interest in the Leases and Fee
subject to this agreement may be assigned or transferred by Skyline, in whole or
in part,  without the prior written consent of Cedar Ridge;  provided,  however,
that in such  event  Skyline  shall  remain  liable for the  performance  of its
obligations under this Agreement,  the Exhibits  attached hereto,  and all other
documents  executed at closing,  and further  provided that any such  assignment
shall  nevertheless  be  void  unless  it is  made  expressly  subject  to  this
Agreement.

4.5 THIS  AGREEMENT,  THE JOINT  OPERATING  AGREEMENT,  AND ANY OTHER  DOCUMENTS
EXECUTED AND DELIVERED  PURSUANT HERETO AND THE LEGAL  RELATIONSHIP  BETWEEN THE
PARTIES WITH RESPECT TO THIS  AGREEMENT,  SHALL BE GOVERNED BY AND  CONSTRUED IN
ACCORDANCE  WITH  THE LAWS OF THE  STATE OF  COLORADO  WITHOUT  REGARD  TO RULES
GOVERNING CONFLICTS OF LAW.

4.6 Cedar Ridge  represents  and  acknowledges  that prior to entering into this
Agreement,  Cedar Ridge was  advised by and has relied  solely on its own legal,
tax and other professional counsel concerning this Agreement, the Leases and the
value thereof.  Cedar Ridge represents and acknowledges that it is knowledgeable
in the area of oil and gas, including coal seam gas exploration and development,
and is able to bear the economic risk of any oil and gas investment  Cedar Ridge
is  obligated  to or might  choose to make in the Leases and that Cedar Ridge is
capable of evaluating the merits and risks of  investments in the Leases.  Cedar
Ridge  represents and  acknowledges  that it is acquiring the Leases for its own
account and not for  distribution or resale in any manner that would violate any
state or federal securities law, rule, regulation or order.

Page 3 of 4

<PAGE>

4.7 This Agreement, the Purchase and Sale Agreement dated February 17, 2003, and
the  documents  dated  March 7,  2003 and  signed  contemporaneously  with  this
Agreement,  contain the entire  understanding of the parties hereto with respect
to  the  subject  matter  hereof  and  shall  supercede  all  prior  agreements,
understandings,  negotiations and discussions  among the parties with respect to
such subject matter. No representations,  inducements,  promises, or agreements,
oral or otherwise,  which are not embodied in this  Agreement,  the Purchase and
Sale Agreement  dated February 17, 2003, and the other March 7, 2003  documents,
shall be of any force or effect. This Agreement may be executed in any number of
counterparts,  each of which will be  considered  an original for all  purposes.
Skyline and Cedar Ridge contributed to the preparation of this Agreement and the
terms and  conditions  contained  herein  shall not be construed in a light more
favorable to one party than the other.

4.8 If any one or more of the provisions of this  Agreement  shall be determined
to be invalid,  illegal or unenforceable in any respect, the validity,  legality
and enforceability of the remaining provisions contained herein shall not in any
way be affected or impaired,  and the offending provision or provisions shall be
reformed, and the remaining provisions interpreted, so as to give effect, to the
maximum extent permissible, to the agreement of the parties as set out herein.

4.9 Neither Skyline nor Cedar Ridge shall make, nor permit any of its affiliates
or  representatives  to  make,  any news  release  or  other  public  disclosure
pertaining to this Agreement or the transactions contemplated hereby without the
prior  written  approval of the other  parties as to timing,  form and  content,
which  approval  shall  not  be  unreasonably   withheld.   Notwithstanding  the
foregoing,  either party may make such news  release or other public  disclosure
which,  in the opinion of such party's legal counsel,  is required to be made by
such party pursuant to the  applicable  securities  laws or securities  exchange
rules.

     If the foregoing  terms and conditions  confirm your  understanding  of our
Agreement,  please  execute in the space  provided  below for your signature and
return one (1) fully  executed  original of this Agreement to our offices at the
above address.

Yours very truly,

CEDAR RIDGE L.L.C.

/s/ Terry L. Logan
----------------------------------------
Terry L. Logan
Manager

Attachments
Agreed to and accepted this the 24th day of March,  2003, but effective February
28, 2003 at 11:59 p.m.

SKYLINE RESOURCES, INC

/s/ Jubal S. Terry
-----------------------------------------
By: Jubal S. Terry, President/CEO

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