Document:

ex_10-1.htm

    Exhibit
10.1

     

     

     

    
      FIFTH
AMENDMENT

       

      TO

       

      CREDIT
AGREEMENT

       

      Among

       

      LEGACY
RESERVES LP

      as
Borrower,

       

      BNP
PARIBAS,

      as
Administrative Agent,

       

      and

       

      The
Lenders Signatory Hereto

       

      

       

      Effective
as of October 6, 2008

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      FIFTH
AMENDMENT TO CREDIT AGREEMENT

       

      This
FIFTH AMENDMENT TO CREDIT AGREEMENT (this “Fifth Amendment”)
executed effective as of October 6, 2008 (the “Fifth Amendment Effective
Date”) is among LEGACY RESERVES LP, a limited partnership formed under
the laws of the State of Delaware (the “Borrower”), each of
the undersigned guarantors (the “Guarantors”, and
together with the Borrower, the “Obligors”), each of the Lenders that is a
signatory hereto, and BNP PARIBAS, as administrative agent for the Lenders (in
such capacity, together with its successors, the “Administrative
Agent”).

       

      Recitals

       

      A.           The
Borrower, the Administrative Agent and the Lenders are parties to that certain
Credit Agreement dated as of March 15, 2006 (as amended to date, the “Credit Agreement”),
pursuant to which the Lenders have made certain credit available to and on
behalf of the Borrower.

       

      B.           The
Borrower has requested and the Administrative Agent and the Lenders have agreed
to amend certain provisions of the Credit Agreement.

       

      C.           NOW,
THEREFORE, in consideration of the premises and the mutual covenants herein
contained, for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

       

      Section 1.Defined
Terms.  Each capitalized term which is defined in the Credit
Agreement, but which is not defined in this Fifth Amendment, shall have the
meaning ascribed to such term in the Credit Agreement.  Unless
otherwise indicated, all section references in this Fifth Amendment refer to the
Credit Agreement.

       

      Section 2. 
Amendments to
Credit Agreement.

       

      2.1           Definitions.  Section
1.02 is hereby amended by:

       

      
        	
                 
      

              	
                (a)

              	
                amending
      and restating the following definitions as
  follows:

              

      

       

      “‘Agreement’ means this
Credit Agreement, as amended by that certain First Amendment to Credit
Agreement, dated as of July 7, 2006, the Second Amendment to Credit Agreement,
dated as of May 3, 2007, the Third Amendment to Credit Agreement, dated as of
October 24, 2007, the Fourth Amendment to Credit Agreement, dated as of April
24, 2008, and the Fifth Amendment to Credit Agreement, dated as of October 6,
2008, and as the same may from time to time be further amended, modified,
supplemented or restated.”

       

      “‘Applicable Margin’
means, for any day, with respect to any ABR Loan or Eurodollar Loan, as the case
may be, the rate per annum set forth in the Borrowing Base Utilization Grid
below based upon the Borrowing Base Utilization Percentage then in
effect:

       

      
        
          
          

        

        
          Fifth
Amendment - 1

          
            

          

        

        
          
          

        

      

       

      
        	 
      	
                Borrowing
      Base Utilization Percentage

              	
                Eurodollar
      Loans

              	
                ABR
      Loans

              
	
                Level
      1

              	
                less
      than 33%

              	
                1.500%

              	
                0.000%

              
	
                Level
      2

              	
                greater
      than or equal to 33%, but less than 66%

              	
                1.750%

              	
                0.250%

              
	
                Level
      3

              	
                greater
      than or equal to 66%, but less than 85%

              	
                2.000%

              	
                0.375%

              
	
                Level
      4

              	
                greater
      than or equal to 85%

              	
                2.125%

              	
                0.500%

              

      

      

       

      Each
change in the Applicable Margin shall apply during the period commencing on the
effective date of such change and ending on the date immediately preceding the
effective date of the next such change, provided, however, that if at any time
the Borrower fails to deliver a Reserve Report pursuant to Section 8.12(a), then
the “Applicable Margin” means the rate per annum set forth on the grid when the
Borrowing Base Utilization Percentage is at its highest level.”

       

      
        	
                 
      

              	
                (b)

              	
                Adding
      the following new term in the appropriate alphabetical
    order:

              

      

       

      “‘Total Debt’ means, at
any date, all Debt of the Borrower and the Consolidated Subsidiaries on a
consolidated basis, excluding (i) non-cash obligations under FAS 133 and (ii)
accounts payable and other accrued liabilities (for the deferred purchase price
of Property or services) from time to time incurred in the ordinary course of
business which are not greater than ninety (90) days past the date of invoice or
delinquent or which are being contested in good faith by appropriate action and
for which adequate reserves have been maintained in accordance with
GAAP.  The term ‘Total Debt’ specifically excludes any obligations of
the Borrower under any Swap Agreements.”

       

      2.2           Section
9.01.                                Section
9.01 is hereby amended by adding a new subsection (c) as follows:

       

      “(c)           Ratio of Total Debt to
EBITDA.  The Borrower will not, on the last day of any fiscal
quarter, permit its ratio of Total Debt as of such time to EBITDA for the four
fiscal quarters ending on the last day of the fiscal quarter immediately
preceding the date of determination for which financial statements are available
to be greater than 3.75 to 1.00.”

       

      
        
          
          

        

        
          Fifth
Amendment - 2

          
            

          

        

        
          
          

        

      

       

      Section 3. 
Assignment;
Borrowing Base.

       

      3.1           Assignments, New Lenders and
Reallocation of Commitments and Loans.  The Lenders have agreed
among themselves, in consultation with the Borrower, to reallocate their
respective Maximum Credit Amounts and Commitments and to, among other things,
allow each of Royal Bank of Canada and Wells Fargo Bank, N.A. to become a party
to the Credit Agreement as a Lender, (each a “New Lender”) by
acquiring an interest in the total Maximum Credit Amounts and Commitments and to
increase the Maximum Credit Amounts and Commitment of Compass Bank and The Bank
of Nova Scotia (each an “Increasing Lender”)
and to decrease completely the Maximum Credit Amount and Commitment of Comerica
Bank (the “Exiting
Lender”).  The Administrative Agent and the Borrower hereby
consent to such reallocation and each New Lender’s and Increasing Lender’s
acquisition of an interest in the Maximum Credit Amounts and Commitments and the
Exiting Lender’s and other Lenders’ assignments of their
Commitments.  On the Fifth Amendment Effective Date and after giving
effect to such reallocations, the Maximum Credit Amounts and Commitment of each
Lender shall be as set forth on Annex I of this Fifth
Amendment which Annex I supersedes and replaces the Annex I to the Credit
Agreement.  With respect to such reallocation, each New Lender and
Increasing Lender shall be deemed to have acquired the Maximum Credit Amounts
and Commitment allocated to it from each of the other Lenders pursuant to the
terms of the Assignment and Assumption Agreement attached as Exhibit D to the
Credit Agreement as if such New Lender, such Increasing Lender, such Exiting
Lender and the other Lenders had executed an Assignment and Assumption Agreement
with respect to such allocation.

       

      3.2           Borrowing
Base.  For the period from and including the Fifth Amendment
Effective Date to but excluding the next Redetermination Date, the amount of the
Borrowing Base shall be equal to $383,760,000.  Notwithstanding the
foregoing, the Borrowing Base may be subject to further adjustments from time to
time pursuant to Section 8.13(c) or Section 9.12(d).

       

      Section 4.Conditions
Precedent.  The effectiveness of this Fifth Amendment is
subject to the receipt by the Administrative Agent of the following documents
and satisfaction of the other conditions provided in this Section 4, each of
which shall be reasonably satisfactory to the Administrative Agent in form and
substance:

       

      4.1           Fifth
Amendment.  The Administrative Agent shall have received
multiple counterparts as requested of this Fifth Amendment from each Lender and
the Borrower.

       

      4.2           Notes.  The
Administrative Agent shall have received a Note payable to the order of each
Lender in the amount of such Lender’s Commitment after giving effect to the
assignment and increase in commitments pursuant to this Fifth Amendment, duly
executed and delivered by Borrower, to be dated as of the Fifth Amendment
Effective Date.

       

      4.3           Borrowing Base Increase
Fee.  The Administrative Agent shall have received payment of
all fees and other amounts due and payable, including, for the account of each
Lender party to this Amendment, a Borrowing Base increase fee equal to the
product of (a) 1 bp per $1,000,000 of such Lender’s approved credit amount and
(b) the difference between such Lender’s Commitment and such Lender’s highest
Commitment previously in effect, payable on the Fifth Amendment Effective
Date.

       

      
        
          
          

        

        
          Fifth
Amendment - 3

          
            

          

        

        
          
          

        

      

       

      4.4           No
Default.  No Default or Event of Default shall have occurred
and be continuing as of the Fifth Amendment Effective Date.

       

      Section 5.Representations and
Warranties; Etc.  Each Obligor hereby affirms:  (a)
that as of the date of execution and delivery of this Fifth Amendment, all of
the representations and warranties contained in each Loan Document to which such
Obligor is a party are true and correct in all material respects as though made
on and as of the Fifth Amendment Effective Date (unless made as of a specific
earlier date, in which case, was true as of such date); and (b) that after
giving effect to this Fifth Amendment and to the transactions contemplated
hereby, no Defaults exist under the Loan Documents or will exist under the Loan
Documents.

       

      Section 6. 
Miscellaneous.

       

      6.1           Confirmation.  The
provisions of the Credit Agreement (as amended by this Fifth Amendment) shall
remain in full force and effect in accordance with its terms following the
effectiveness of this Fifth Amendment.

       

      6.2           Ratification and Affirmation
of Obligors.  Each of the Obligors hereby expressly (a)
acknowledges the terms of this Fifth Amendment, (b) ratifies and affirms its
obligations under the Guaranty Agreement and the other Security Instruments to
which it is a party, (c) acknowledges, renews and extends its continued
liability under the Guaranty Agreement and the other Security Instruments to
which it is a party and (d) agrees that its guarantee under the Guaranty
Agreement and the other Security Instruments to which it is a party remains in
full force and effect with respect to the Indebtedness as amended
hereby.

       

      6.3           Counterparts.  This
Fifth Amendment may be executed by one or more of the parties hereto in any
number of separate counterparts, and all of such counterparts taken together
shall be deemed to constitute one and the same instrument.

       

      6.4           No Oral
Agreement.  THIS WRITTEN FIFTH AMENDMENT, THE CREDIT AGREEMENT
AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THEREWITH
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS OF THE
PARTIES.  THERE ARE NO SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
PARTIES.

       

      6.5           Governing
Law.  THIS FIFTH AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE
VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.

       

      6.6           Notes.  Within
a reasonable time after the Fifth Amendment Effective Date, each Lender that
receives a new Note pursuant to the assignments herein shall return its existing
Note to the Borrower.

       

      
        
          
          

        

        
          Fifth
Amendment - 4

          
            

          

        

        
          
          

        

      

       

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

       

      
        
          	BORROWER:	
                  LEGACY RESERVES
      LP

                   

                  By:    Legacy Reserves GP, LLC,

                          its general
      partner

                	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett 	 
	 	 	President,
      Chief Financial Officer and Secretary	 
	 	 	 	 

        

        
          	GUARANTORS:	
                  LEGACY RESERVES OPERATING
      LP

                   

                  By:    Legacy Reserves Operating
      GP LLC

                             its general
      partner

                	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett	 
	 	 	President,
      Chief Financial Officer and Secretary 	 
	 	 	 	 

        

        
          	 	LEGACY
      RESERVES OPERATING GP LLC	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett	 
	 	 	President,
      Chief Financial Officer and Secretary	 
	 	 	 	 

        

        
          	 	LEGACY
      RESERVES SERVICES, INC.	 
	 	 	 	 
	
                   

                	
                  By:
      

                	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett	 
	 	 	President,
      Chief Financial Officer and Secretary	 
	 	 	 	 

        

         

      

      
        
           

        

        
          
            Fifth
Amendment 

            Signature Page - 1

          

          
            

          

        

        
           

        

      

    

     

    
      
        	ADMINISTRATIVE
      AGENT:	
                BNP
      PARIBAS,

                as Administrative
      Agent and Lender

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Russell
      Otts	 
	 	 	Russell
      Otts	 
	 	 	Director	 
	 	 	 	 

      

    

    
      	
               

            	
              By:
      

            	/s/ Betsy
      Jocher	 
	 	 	Betsy
      Jocher 	 
	 	 	Director	 
	 	 	 	 

    

     

    
      
        	LENDERS: 	BANK
      OF AMERICA N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Charles
      W. Patterson	 
	 	 	Charles
      W. Patterson	 
	 	 	Managing
      Director	 
	 	 	 	 

      

    

     

    
      
        	 	COMERICA
      BANK	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Rebecca
      L. Wilson	 
	 	 	Rebecca
      L. Wilson	 
	 	 	Assistant
      Vice President	 
	 	 	 	 

      

    

     

    
      
        	 	KEYBANK
      N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Todd
      Coker	 
	 	 	Todd
      Coker	 
	 	 	Assistant
      Vice President	 
	 	 	 	 

      

    

     

    
      
        	 	WACHOVIA
      BANK, N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Jay
      Buckman	 
	 	 	Jay
      Buckman	 
	 	 	Vice
      President	 
	 	 	 	 

      

    

     

    
      
         

      

      
        
          Fifth
Amendment

          Signature Page - 2

        

        
          

        

      

      
         

      

    

     

    
      
        	 	FORTIS
      CAPITAL CORP.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Ilene
      Fowler	 
	 	 	Ilene
      Fowler	 
	 	 	Director	 
	 	 	 	 

      

    

    
      	
               

            	
              By:
      

            	/s/ Michele
      Jones	 
	 	 	Michele
      Jones	 
	 	 	Director	 
	 	 	 	 

    

     

    
      
        	 	COMPASS
      BANK	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Kathleen
      J. Bowen	 
	 	 	Kathleen
      J. Bowen	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

    
      
        	 	THE
      BANK OF NOVA SCOTIA	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ David
      G. Mills	 
	 	 	David
      G. Mills	 
	 	 	Director	 
	 	 	 	 

      

    

     

    
      
        	 	ROYAL
      BANK OF CANADA	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Don
      J. McKinnerney	 
	 	 	Don
      J. McKinnerney	 
	 	 	Authorized
      Signatory	 
	 	 	 	 

      

    

     

    
      
        	 	WELLS
      FARGO BANK, N.A.	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Charles
      D. Kirkham	 
	 	 	Charles
      D. Kirkham	 
	 	 	Senior
      Vice President	 
	 	 	 	 

      

    

     

     

    
      
         

      

      
        
          Fifth
Amendment

          Signature Page - 3ex_10-2.htm

    Exhibit 10.2

     

     

     

    
      

      

      

      

      

      

      

      

      

      

      

      PURCHASE
AND SALE AGREEMENT

      

      BY
AND AMONG

       

      CANO
PETROLEUM, INC.,

       

      AS
SELLER

       

      AND

       

      LEGACY
RESERVES OPERATING LP,

      

      AS
BUYER

      

      AND

      

      PANTWIST,
LLC,

      

      AS
THE COMPANY

       

       

       

       

    

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      
        TABLE OF
CONTENTS

        

        PAGE

        
          	
                  1.

                	
                  PURCHASE
      AND SALE.

                	
                  1

                
	
                  1.1

                	
                  Purchase
      of the Membership Interests.

                	
                  1

                
	
                  1.2

                	
                  Excluded
      Assets and Liabilities.

                	
                  1

                
	
                  2.

                	
                  PURCHASE
      PRICE.

                	
                  1

                
	
                  2.1

                	
                  Base
      Purchase Price.

                	
                  1

                
	
                  2.2

                	
                  Deposit.

                	
                  1

                
	
                  2.3

                	
                  Certain
      Definitions.

                	
                  2

                
	
                  2.4

                	
                  Adjustments
      to the Base Purchase Price

                	
                  3

                
	
                  2.5

                	
                  Allocation

                	
                  4

                
	
                  3.

                	
                  CLOSING.

                	
                  5

                
	
                  3.1

                	
                  Closing

                	
                  5

                
	
                  3.2

                	
                  Delivery
      by Seller

                	
                  5

                
	
                  3.3

                	
                  Delivery
      by Buyer

                	
                  5

                
	
                  3.4

                	
                  Further
      Cooperation

                	
                  6

                
	
                  4.

                	
                  ACCOUNTING
      ADJUSTMENTS.

                	
                  6

                
	
                  4.1

                	
                  Closing
      Adjustments

                	
                  6

                
	
                  4.2

                	
                  Strapping
      and Gauging

                	
                  6

                
	
                  4.3

                	
                  Taxes.

                	
                  6

                
	
                  4.4

                	
                  Post-Closing
      Adjustments.

                	
                  7

                
	
                  4.5

                	
                  Suspended
      Funds

                	
                  8

                
	
                  4.6

                	
                  Audit
      Adjustments

                	
                  8

                
	
                  4.7

                	
                  Cooperation

                	
                  8

                
	
                  5.

                	
                  DUE
      DILIGENCE: TITLE MATTERS.

                	
                  8

                
	
                  5.1

                	
                  General
      Access.

                	
                  8

                
	
                  5.2

                	
                  Defensible
      Title

                	
                  9

                
	
                  5.3

                	
                  Defect
      Letters.

                	
                  10

                
	
                  5.4

                	
                  Effect
      of Title Defect.

                	
                  12

                
	
                  5.5

                	
                  Consents

                	
                  13

                
	
                  6.

                	
                  ENVIRONMENTAL
      ASSESSMENT.

                	
                  14

                
	
                  6.1

                	
                  Physical
      Condition of the Oil and Gas Properties.

                	
                  14

                
	
                  6.2

                	
                  Inspection
      and Testing.

                	
                  15

                
	
                  6.3

                	
                  Notice
      of Adverse Environmental Conditions

                	
                  16

                
	
                  6.4

                	
                  Rights
      and Remedies for Adverse Environmental Conditions.

                	
                  16

                
	
                  6.5

                	
                  Remediation
      by Seller

                	
                  18

                
	
                  7.

                	
                  REPRESENTATIONS
      AND WARRANTIES OF SELLER.

                	
                  19

                
	
                  7.1

                	
                  Seller’s
      Representations and Warranties

                	
                  19

                
	
                  7.2

                	
                  Scope
      of Representations of Seller.

                	
                  26

                
	
                  8.

                	
                  REPRESENTATIONS
      AND WARRANTIES OF BUYER.

                	
                  28

                
	
                  8.1

                	
                  Buyer’s
      Representations and Warranties

                	
                  28

                
	
                  9.

                	
                  CERTAIN
      AGREEMENTS OF SELLER

                	
                  29

                
	
                  9.1

                	
                  Maintenance
      of Oil and Gas Properties

                	
                  29

                
	
                  9.2

                	
                  Conduct
      of Business of the Company.

                	
                  29

                

        

         

        
          
             

          

          
            Page
i

            
              

            

          

          
             

          

        

         

        
          	
                  9.3

                	
                  Records
      and Audit Rights

                	
                  31

                
	
                  9.4

                	
                  Reasonable
      Efforts; Notification.

                	
                  32

                
	
                  9.5

                	
                  Payment
      of Indebtedness

                	
                  32

                
	
                  9.6

                	
                  Insider
      Debt and Liabilities

                	
                  32

                
	
                  9.7

                	
                  Operation
      of Oil and Gas Properties

                	
                  33

                
	
                  10.

                	
                  CERTAIN
      AGREEMENTS OF BUYER

                	
                  33

                
	
                  10.1

                	
                  Plugging
      Obligation

                	
                  33

                
	
                  10.2

                	
                  Plugging
      Bond

                	
                  33

                
	
                  10.3

                	
                  Seller’s
      Logos

                	
                  33

                
	
                  10.4

                	
                  Like-Kind
      Exchanges

                	
                  33

                
	
                  11.

                	
                  CONDITIONS
      PRECEDENT TO OBLIGATIONS OF BUYER

                	
                  34

                
	
                  11.1

                	
                  No
      Litigation

                	
                  34

                
	
                  11.2

                	
                  Representations
      and Warranties

                	
                  34

                
	
                  11.3

                	
                  Operations

                	
                  34

                
	
                  11.4

                	
                  Due
      Diligence

                	
                  34

                
	
                  11.5

                	
                  Releases

                	
                  34

                
	
                  11.6

                	
                  Release
      of Indebtedness and Liens

                	
                  34

                
	
                  12.

                	
                  CONDITIONS
      PRECEDENT TO THE OBLIGATIONS OF SELLER

                	
                  34

                
	
                  12.1

                	
                  No
      Litigation

                	
                  34

                
	
                  12.2

                	
                  Representations
      and Warranties

                	
                  34

                
	
                  13.

                	
                  TERMINATION.

                	
                  35

                
	
                  13.1

                	
                  Causes
      of Termination

                	
                  35

                
	
                  13.2

                	
                  Effect
      of Termination.

                	
                  35

                
	
                  14.

                	
                  INDEMNIFICATION.

                	
                  36

                
	
                  14.1

                	
                  Indemnification
      by Seller

                	
                  36

                
	
                  14.2

                	
                  Indemnification
      by Buyer

                	
                  38

                
	
                  14.3

                	
                  Physical
      Inspection

                	
                  38

                
	
                  14.4

                	
                  Notification

                	
                  39

                
	
                  15.

                	
                  TAX
      MATTERS.

                	
                  39

                
	
                  16.

                	
                  MISCELLANEOUS.

                	
                  40

                
	
                  16.1

                	
                  Casualty
      Loss.

                	
                  40

                
	
                  16.2

                	
                  Confidentiality.

                	
                  41

                
	
                  16.3

                	
                  Notices

                	
                  42

                
	
                  16.4

                	
                  Press
      Releases and Public Announcements

                	
                  42

                
	
                  16.5

                	
                  Compliance
      with Express Negligence Test

                	
                  42

                
	
                  16.6

                	
                  Governing
      Law

                	
                  43

                
	
                  16.7

                	
                  Exhibits

                	
                  43

                
	
                  16.8

                	
                  Fees
      and Expenses

                	
                  43

                
	
                  16.9

                	
                  Assignment

                	
                  43

                
	
                  16.10

                	
                  Entire
      Agreement

                	
                  43

                
	
                  16.11

                	
                  Severability

                	
                  43

                
	
                  16.12

                	
                  Captions

                	
                  43

                
	
                  16.13

                	
                  Time
      of the Essence

                	
                  43

                
	
                  16.14

                	
                  Counterpart
      Execution

                	
                  44

                

        

      

    

     

    
      
         

      

      
        Page
ii

        
          

        

      

      
         

      

    

     

    
      

      EXHIBITS

      

      A           Leases
and Land

      B           Wells
and Allocation of the Purchase Price

      C           Equipment

      D           Excluded
Assets

      

      SCHEDULES

      

      7.1(E)                      AFE’s

      7.1(G)                      Pending
Litigation

      7.1(K)                      Material
Agreements

      7.1(M)                      Consents
and Preferential Purchase Rights

      7.1(AA)                      Insurance

      7.1(BB)                      Bank
Accounts

      7.1(EE)                      Related
Party Transactions

      7.1(FF)                      Payout
Balances

      7.1(II)                      Non-Competition
Commitments

      

      
        
           

        

        
          Page
iii

          
            

          

        

        
           

        

      

       

      PURCHASE AND SALE
AGREEMENT

       

      This Purchase and Sale Agreement (this
“Agreement”) is entered into this 5th day of September, 2008, by and among CANO PETROLEUM, INC., a
Delaware corporation (“Seller”), LEGACY RESERVES OPERATING LP,
a Delaware limited partnership (“Buyer”), and PANTWIST, LLC, a Texas limited
liability company (the “Company”).  Buyer, Seller and the Company are
collectively referred to herein as the “Parties” and sometimes individually
referred to as a “Party.”

      

      RECITALS:

       

      
        	
                A.

              	
                The
      Company is a Texas limited liability company with its principal executive
      offices at 801 Cherry Street, Unit 25, Suite 3200, Fort Worth,
      Texas.

              

      

       

      
        	
                B.

              	
                Seller
      owns all of the issued and outstanding membership interests of the Company
      (the “Membership Interests”), constituting all of the equity interests and
      ownership of the Company.

              

      

       

      
        	
                C.

              	
                Seller
      desires to sell to Buyer and Buyer desires to purchase from Seller all of
      the Membership Interests pursuant to the terms
  hereof.

              

      

       

      WITNESSETH:

       

      In
consideration of the mutual agreements contained in this Agreement and other
good and valuable consideration, Buyer and Seller agree as follows:

       

      1.           PURCHASE AND
SALE.

       

      1.1           Purchase of the Membership
Interests.  Subject
to the terms and conditions of this Agreement, on the Closing Date, Seller
agrees to sell and convey to Buyer, free and clear of all Encumbrances, and
Buyer agrees to purchase and accept from Seller, all of the Membership
Interests.

       

      1.2           Excluded Assets and
Liabilities.  The
assets (“Excluded Assets”) and liabilities of the Company described on Exhibit D are
excluded from this purchase and shall be distributed or transferred to, or
assumed by, Seller or a designee of Seller immediately prior to Closing pursuant
to appropriate documents approved in advance by Buyer.  Seller or its
designee to whom any of the foregoing assets are distributed or transferred
shall expressly assume all liabilities and obligations related to the
foregoing.

       

      2.           PURCHASE
PRICE.

       

      2.1           Base Purchase
Price. 
The purchase price for the Assets is Forty Two Million Seven Hundred Thousand
Dollars ($42,700,000) (the “Base Purchase Price”).

       

      2.2           Deposit. 
Within
three (3) days of the execution of this Agreement, Buyer shall deliver to
Seller, in cash by wire-transfer in immediately available funds to an account
designated by Seller, a Deposit in an amount equal to Two Million One Hundred
Thirty Five Thousand ($2,135,000) (such amount together with all accrued
interest thereon, the “Deposit”).  Prior to Closing, the Deposit shall
be maintained by Seller in an interest bearing account.  The Deposit
shall be distributed to Seller and credited to the Base Purchase Price at
Closing, or if this Agreement is terminated, shall be distributed or retained
pursuant to 

       

      
        
           

        

        
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      Article 13.  In
the event the Deposit is not delivered to Seller as prescribed, this Agreement
shall terminate.

       

      2.3           Certain
Definitions.  As used
in this Agreement, the following terms shall have the following meanings (other
capitalized terms are defined throughout this Agreement):

       

      
        	
                (A)

              	
                “Oil
      and Gas Properties” means (in each case other than the Excluded
      Assets)

              

      

       

      
        	
                 
      

              	
                (i)

              	
                all
      of the Company’s right, title and interest in, to and under the oil, gas
      and/or mineral  leases described on Exhibit A
      attached hereto (the “Leases”), whether or not such interests are
      accurately or completely described on Exhibit A, and
      all of the Company’s oil and gas leasehold, mineral, royalty, overriding
      royalty, surface or other interests in the lands covered by the Leases or
      in the lands described on Exhibit A
      (collectively, the “Land”), together with all the property and rights
      incident thereto, including without limitation all of the Company’s rights
      in, to and under all operating agreements; pooling, communitization and
      unitization agreements; farmout agreements; joint venture agreements;
      product purchase and sale contracts; transportation, processing, treatment
      or gathering agreements; leases; permits (the “Permits”); rights-of-way
      (the “Rights-of-Way”); surface use agreements; surface leases; surface
      estates; easements (the “Easements”); licenses; options; declarations;
      orders; contracts; and instruments in any way relating to the Leases or
      Land;

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                all
      of the Company’s right, title and interest in and to the wells situated on
      or used in conjunction with operations on the Leases and/or Land or on
      land pooled, communitized or unitized therewith (“Pooled Land”),
      including, without limitation, all producing, non-producing, injection,
      disposal and water supply wells and the wells listed on Exhibit B
      attached hereto (collectively, the
“Wells”);

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                all
      of the Company’s right, title and interest in and to all of the personal
      property, fixtures, improvements and other property, whether real,
      personal or mixed, now or as of the Effective Time on, appurtenant to or
      used or obtained by the Company in connection with the Leases, Land,
      Pooled Land or Wells or with the production, injection, treatment, sale or
      disposal of hydrocarbons and all other substances produced therefrom or
      attributable thereto, including, without limitation, well equipment,
      casing, tubing, tanks, generators, boilers, buildings, pumps, motors,
      machinery, pipelines, gathering systems, power lines, telephone and
      telegraph lines, roads, field processing plants, field offices and other
      furnishings related thereto, all vehicles, rolling stock, pulling units,
      equipment leases, trailers, inventory in storage and storage yards located
      thereon or used in connection therewith, all of the equipment and other
      personal property described on Exhibit C
      attached hereto, and all other improvements or appurtenances thereunto
      belonging (collectively, the
“Equipment”);

              

      

       

      
        
           

        

        
          Page
2

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                “Oil
      and Gas” means all of the oil and gas and associated hydrocarbons in and
      under or otherwise attributable to the Leases, Land, and Pooled Land or
      produced from the Wells; and

              

      

       

      
        	
                (C)

              	
                “Effective
      Time” means 7:00 a.m. (Central Time) on July 1,
  2008.

              

      

       

      
        	
                (D)

              	
                “Affiliate”
      means, with respect to any person, any other person that directly or
      indirectly, through one or more intermediaries, controls, is controlled
      by, or is under common control with, such first
  person.

              

      

       

      2.4           Adjustments to the Base
Purchase Price.  At
Closing, appropriate adjustments to the Base Purchase Price shall be made as
follows in accordance with Section 4.1 (as adjusted, the “Purchase
Price”):

       

      
        	
                (A)

              	
                The
      Base Purchase Price shall be adjusted upward
by:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                the
      value of the Oil and Gas in inventory as of the Effective Time pursuant to
      Section 4.2;

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                Property
      Taxes and Severance Taxes related to the Assets prepaid by Seller or the
      Company but attributable to the period following the Effective Time as
      determined pursuant to Section 4.3;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                an
      amount equal to the costs, expenses and other expenditures, excluding
      amounts paid for overhead, (whether capitalized or expensed) prepaid by
      the Company before the Effective Time in accordance with this Agreement
      that are attributable to the Oil and Gas Properties for the period from
      and after the Effective Time;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                for
      all operated Wells, a monthly overhead fee of $400, prorated for partial
      months, per active producing Well while Seller or its affiliate is
      operating the Oil and Gas Properties from and after the Effective
      Time;

              

      

       

      
        	
                 
      

              	
                (v)

              	
                an
      amount equal to the amount of proceeds derived from the sale of Oil and
      Gas net of royalties and severance taxes paid by the Company, actually
      received by the Company after the Effective Time and directly attributable
      to the Wells which are, in accordance with generally accepted accounting
      procedures, attributable to the period of time prior to the Effective
      Time; and

              

      

       

      
        	
                 
      

              	
                (vi)

              	
                any
      other amount agreed upon in writing by Seller and
  Buyer.

              

      

       

      
        	
                (B)

              	
                The
      Base Purchase Price shall be adjusted downward
  by:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                an
      amount equal to the amount of proceeds derived from the sale of Oil and
      Gas, , net of royalties and severance taxes paid by the Company, actually
      received by the Company and directly attributable to the Wells which are,
      in accordance with generally accepted accounting procedures, attributable
      to the period of time from and after the Effective
  Time;

              

      

       

      
        
           

        

        
          Page
3

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (ii)

              	
                an
      amount equal to all expenditures, liabilities and costs relating to the
      Oil and Gas Properties (other than Property Taxes and Severance Taxes
      related to the Oil and Gas Properties) that are unpaid as of the Closing
      Date and assessed for or attributable to periods of time or the ownership
      of production prior to the Effective Time regardless how such
      expenditures, liabilities and costs are calculated provided that to the
      extent the actual amounts cannot be determined prior to the agreement of
      Buyer and Seller with respect to the Closing Adjustment Statement, a
      reasonable estimate of such expenditures, liabilities and costs shall be
      used;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                all
      amounts related to Title Defects as determined pursuant to Section 5.4,
      consents and preferential rights as determined pursuant to Section 5.5,
      Adverse Environmental Conditions as determined pursuant to Section 6.4,
      Exclusion Adjustments as determined pursuant to Sections 5.5 or 6.4, and
      Casualty Losses as determined pursuant to Section
  15.1;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                Property
      Taxes and Severance Taxes related to the Oil and Gas Properties to be paid
      by the Company after the Effective Time but attributable to the period
      prior to the Effective Time as determined pursuant to Section
      4.3;

              

      

       

      
        	
                 
      

              	
                (v)

              	
                the
      amount of the Deposit;

              

      

       

      
        	
                 
      

              	
                (vi)

              	
                an
      amount equal to any and all dividends, distributions or other payments of
      any kind made by the Company after the Effective Time to or for the
      benefit, directly or indirectly, of Seller or any of its Affiliates,
      including any costs or expenses related to this Agreement or the
      transactions contemplated hereby;

              

      

       

      
        	
                 
      

              	
                (vii)

              	
                an
      amount equal to all income, employment, franchise and other taxes, and
      penalties and interest related thereto, paid or payable by Company after
      the Effective Time but attributable to periods on or prior to the
      Effective Time;

              

      

       

      
        	
                 
      

              	
                (viii)

              	
                an
      amount equal to all other liabilities of the Company not otherwise
      included in an adjustment to the Base Purchase Price pursuant to this
      Section 2.4(B), excluding asset retirement obligations paid or payable
      after the Effective Time but attributable to periods on or prior to the
      Effective Time; and

              

      

       

      
        	
                 
      

              	
                (ix)

              	
                any
      other amount agreed upon in writing by Seller and
  Buyer.

              

      

       

      
        	
                (C)

              	
                Seller
      shall have the right to collect any receivable, refund or other amounts
      associated with periods prior to the Effective Time.  To the
      extent that Buyer collects any such receivable, refund or other amounts,
      then Buyer shall promptly remit any such amounts to
  Seller.

              

      

       

      

      2.5            Allocation.  The
Base Purchase Price shall be allocated to the Oil and Gas Properties as set
forth in Exhibit B and
Exhibit C.  The Parties agree that the values allocated to
various portions of the Oil and Gas Properties, which are set forth on Exhibit B and Exhibit
C (singularly with respect to each item, the “Allocated Value” and
collectively, the “Allocated Values”), shall be binding on Seller and Buyer and
shall be used only for the purposes of adjusting the Base Purchase Price
pursuant to Sections 4.3 (relating to Taxes), 5.4 (relating to Title Defects),
15.1 (relating to Casualty Losses), and 6.4 (relating to Adverse 

       

      
        
           

        

        
          Page
4

          
            

          

        

        
           

        

      

       

      Environmental
Conditions), and are not intended as a measure of value for any other
purpose.

       

      3.           CLOSING.

       

      3.1           Closing.  The
sale and purchase of the Membership Interests (“Closing”) shall be held at or
before 9:00 a.m. on October 1, 2008 (“Closing Date”).  The Closing
will take place at the offices of the Company, in Fort Worth,
Texas.

       

      3.2           Delivery by
Seller.  At
Closing, Seller shall deliver to Buyer:

       

      
        	
                (A)

              	
                An
      assignment of the Membership Interests and/or, as applicable, certificates
      representing the Membership Interests, duly endorsed (or accompanied by
      duly executed stock powers);

              

      

       

      
        	
                (B)

              	
                Except
      for the Excluded Assets, all personal property of the Company, including,
      without limitation, (i) all files and data (including those in
      electronic form or otherwise), contracts, records, and
      (ii) specifically, lease records, well records, and division order
      records; well files and prospect files; title records (including abstracts
      of title, title opinions and memoranda, and title curative documents
      related to the Leases and Wells); contracts and contract files;
      correspondence; computer data files; micro-fiche data files; geological,
      geophysical and seismic records, interpretations, data, maps and
      information, production records, electric logs, core data, pressure data,
      decline curves and graphical production curves; and accounting records
      (all such items in (ii) are collectively referred to herein as the
      “Records”);

              

      

       

      
        	
                (C)

              	
                On
      or before the Closing Date, the written resignations of all officers,
      managers and employees of the
Company;

              

      

       

      
        	
                (D)

              	
                Executed
      releases of any mortgages or financing statements in favor of any third
      party that may be currently encumbering the Oil and Gas Properties or any
      other assets of the Company;

              

      

       

      
        	
                (E)

              	
                An
      executed Closing Adjustment
Statement;

              

      

       

      
        	
                (F)

              	
                Shareholder
      or member resolutions, as applicable, of the Company and Seller, certified
      by the secretary or other appropriate officer of the Company and Seller,
      authorizing the execution and performance of this Agreement and the
      transactions contemplated hereby;
and

              

      

       

      
        	
                (G)

              	
                Such
      other documents as Seller may reasonably
  request.

              

      

       

      3.3           Delivery by
Buyer.  At
Closing, Buyer shall deliver to Seller:

       

      
        	
                (A)

              	
                The
      Purchase Price set forth in the Closing Adjustment Statement by wire
      transfer in immediately available funds, less the Deposit;
    and

              

      

       

      
        
           

        

        
          Page
5

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                An
      executed Closing Adjustment
Statement.

              

      

       

      3.4           Further
Cooperation.  At
the Closing and thereafter as may be necessary, Seller and Buyer shall execute
and deliver such other instruments and documents and take such other actions as
may be reasonably necessary to evidence and effectuate the transactions
contemplated by this Agreement.

       

      4.           ACCOUNTING
ADJUSTMENTS.

       

      4.1           Closing
Adjustments.  With
respect to matters that can be determined as of the Closing, Seller shall
prepare, in accordance with the provisions of this Article 4, a statement (the
“Closing Adjustment Statement”) with relevant supporting information setting
forth each adjustment to the Base Purchase Price submitted by
Seller.  Seller shall submit the Closing Adjustment Statement to
Buyer, together with all records or data supporting the calculation of amounts
presented on the Closing Adjustment Statement, no later than three (3) business
days prior to the scheduled Closing Date.  Prior to the Closing, Buyer
and Seller shall review the adjustments proposed by Seller in the Closing
Adjustment Statement.  Agreed adjustments shall be taken into account
in computing any adjustments to be made to the Base Purchase Price at the
Closing.  When available, actual figures will be used for the
adjustments at Closing.  To the extent actual figures are not
available, estimates shall be used subject to final adjustments as described in
Section 4.4 below.

       

      4.2           Strapping and
Gauging.  Seller
caused the Oil and Gas in the storage facilities located on, or utilized in
connection with, the Leases to be measured, gauged or strapped as of the
Effective Time.  Seller caused the production meter charts (or if such
do not exist, the sales meter charts) on the pipelines transporting Oil and Gas
from the Leases to be read as of such time.  The Oil and Gas in such
storage facilities above six inches or through the meters on the pipelines as of
the Effective Time shall be allocated to the Seller and shall be valued based on
the price actually paid for Oil and Gas produced from the Oil and Gas Properties
for the month prior to the Effective Time, and the Oil and Gas placed in such
storage facilities after the Effective Time and production upstream of the
aforesaid meters shall belong to the Company and become part of the Oil and Gas
Properties.  Buyer or Buyer’s representative shall have the option to
witness the gauging by Seller.  To the extent, but only to the extent,
the Company does not receive the sales proceeds from the sale of such stored Oil
and Gas prior to Closing, the value of such shared Oil and Gas shall be an
upward adjustment to the Base Purchase Price as provided in
Section 2.4(A).  This provision should not apply to any Oil and
Gas Properties that are not operated by the Company.  There shall be
no settlement for Stock in Tanks on non-operated Oil and Gas
Properties.

       

      4.3           Taxes.

       

      
        	
                (A)

              	
                Property
      Taxes.  All ad valorem taxes, real property taxes,
      personal property taxes and similar obligations assessed on the Oil and
      Gas Properties (“Property Taxes”) shall be apportioned as of the Effective
      Time between Buyer and Seller.  Buyer shall cause the Company to
      file all required reports and returns incident to Property Taxes which are
      due on or after the Closing, and the Company shall pay or cause to be paid
      to the taxing authorities all such taxes reflected on such reports and
      returns.  The Post-Closing Adjustment Statement shall settle all
      liability for Property Taxes, using estimates based on previous
      assessments to the extent current assessments are not
    known.

              

      

       

      
        
           

        

        
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6

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                Sales Taxes, Filing
      Fees, Etc. The Base Purchase Price is net of any sales taxes or
      other transfer taxes.  Buyer shall be liable for any sales tax
      or other transfer tax as well as any applicable conveyance, transfer and
      recording fees.  If Seller is required by applicable state law
      to report and pay these taxes or fees, Buyer shall promptly reimburse
      Seller in full payment of the
invoice.

              

      

       

      
        	
                (C)

              	
                Severance
      Taxes.  All production, severance or excise taxes,
      conservation fees and other similar taxes or fees (other than income
      taxes) payable on a current basis with respect to Oil and Gas produced and
      sold from the Assets (“Severance Taxes”) shall be allocated to Seller to
      the extent the production on which such taxes are based occurs prior to
      the Effective Time and shall be allocated to Buyer to the extent such
      production occurs after the Effective
Time.

              

      

       

      4.4           Post-Closing
Adjustments.

       

      
        	
                (A)

              	
                A
      post-closing adjustment statement (the “Post-Closing Adjustment
      Statement”) based on the actual income and expenses shall be prepared and
      delivered by Seller to Buyer within ninety (90) days after the Closing,
      proposing further adjustments to the calculation of the Purchase Price
      based on the information then available.  Seller or Buyer, as
      the case may be, shall be given access to and shall be entitled to review
      and audit the other Party’s records pertaining to the computation of
      amounts claimed in such Post-Closing Adjustment
  Statement.

              

      

       

      
        	
                (B)

              	
                Within
      thirty (30) days after receipt of the Post-Closing Adjustment Statement,
      Buyer shall deliver to Seller a written statement describing in reasonable
      detail its objections (if any) to any amounts or items set forth on the
      Post-Closing Adjustment Statement.  If Buyer does not raise
      objections within such period, then the Post-Closing Adjustment Statement
      shall become final and binding upon the Parties at the end of such
      period.

              

      

       

      
        	
                (C)

              	
                If
      Buyer raises objections, the Parties shall negotiate in good faith to
      resolve any such objections.  If the Parties are unable to
      resolve any disputed item within thirty (30) days after Buyer’s receipt of
      the Post-Closing Adjustment Statement, any disputed accounting item shall
      be submitted to a nationally recognized independent accounting firm
      mutually agreeable to the Parties who shall be instructed to resolve such
      disputed item within thirty (30) days.  The resolution of
      disputes by the accounting firm so selected shall be set forth in writing
      and shall be conclusive, binding and non-appealable upon the Parties with
      respect to the accounting matters submitted and the Post-Closing
      Adjustment Statement shall become final and binding upon the Parties on
      the date of such resolution.  The fees and expenses of such
      accounting firm shall be paid one-half by Buyer and one-half by
      Seller.

              

      

       

      
        	
                (D)

              	
                After
      the Post-Closing Adjustment Statement has become final and binding on the
      Parties, Seller or Buyer, as the case may be, shall pay to the other such
      sums as are due to settle accounts between the Parties due to differences
      between the estimated Purchase Price paid pursuant to the Closing
      Adjustment Statement and the actual Purchase Price set forth on the
      Post-Closing Adjustment Statement.

              

      

       

      
        
           

        

        
          Page
7

          
            

          

        

        
           

        

      

       

      4.5           Suspended
Funds.  At
the Closing, Seller shall provide to Buyer a listing showing all third party
proceeds from production attributable to the operated Leases which are currently
held in suspense and shall transfer to Buyer all of those suspended
proceeds.  The Company shall be responsible for proper distribution of
all the suspended proceeds, to the extent so identified by Seller, to the
parties lawfully entitled to them and any claims related thereto, and the
Company hereby agrees to indemnify, defend and hold harmless Seller from and
against any and all claims, liabilities, losses, costs and expenses arising out
of or relating to those suspended proceeds and any claims related thereto after
the Effective Time.  Seller shall be responsible and liable for, any
claims, liabilities, losses, costs and expenses arising out of or relating to
those suspended proceeds and any claims related thereto through the Closing Date
and related to any suspended funds not identified by Seller as provided
above.

       

      4.6           Audit
Adjustments.  Seller
retains all rights to adjustments resulting from any operating agreement and
other audit claims asserted against third party operators on transactions
occurring prior to the Effective Time (which includes Buyer, if
applicable).  Any credit received by Buyer pertaining to such an audit
claim shall be paid to Seller within thirty (30) days after
receipt.

       

      4.7           Cooperation.  Each
Party covenants and agrees to promptly inform the other with respect to amounts
owing under Sections 4.4 and 4.6 hereof.

       

      5.           DUE DILIGENCE: TITLE
MATTERS.

       

      5.1           General
Access.

       

      
        	
                (A)

              	
                During
      reasonable business hours, Seller and the Company agree to grant Buyer
      physical access to the Oil and Gas Properties and other assets of the
      Company to allow Buyer to conduct, at Buyer’s sole risk and expense,
      on-site inspections and environmental assessments of the Oil and Gas
      Properties and other assets of the Company.  In connection with
      any such on-site inspections, Buyer agrees not to interfere with the
      normal operation of the Oil and Gas Properties and other assets of the
      Company and agrees to comply with all requirements of the operators of the
      Wells.  If Buyer or its agents prepares an environmental
      assessment of any of the Oil and Gas Properties and other assets of the
      Company, Buyer agrees to keep such assessment confidential.  In
      connection with granting such access, Buyer represents that it is
      adequately insured and waives, releases and agrees to indemnify the Seller
      and the Company against all claims for injury to, or death of, persons or
      for damage to operations or property arising in any way from the access
      afforded to Buyer hereunder or the activities of Buyer, except to the
      extent caused by Seller’s or the Company’s gross negligence or willful
      misconduct.  This waiver, release and indemnity by Buyer shall
      survive termination of this
Agreement.

              

      

       

      
        	
                (B)

              	
                Upon
      the execution of this Agreement, Seller and the Company shall give Buyer
      and its representatives, employees, consultants, independent contractors,
      attorneys and other advisors reasonable access to the Records and other
      books and records of the Company during regular office hours for any and
      all inspections and copying.

              

      

       

      
        
           

        

        
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8

          
            

          

        

        
           

        

      

       

      5.2           Defensible
Title.  As
used herein the term “Defensible Title” shall mean:

       

      
        	
                (A)

              	
                As
      to the Oil and Gas Properties, that record title of the Company
      which:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                entitles
      the Company to receive not less than the interests shown in Exhibit B as
      the “Net Revenue Interest” of all Oil and Gas produced, saved and marketed
      from or allocated to the Wells, all without reduction, suspension or
      termination during the life of such Wells except as stated in such
      Exhibit; and

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                obligates
      the Company to bear a percentage of the costs and expenses relating to the
      maintenance and development of, and operations relating to, the Wells not
      greater than the “Working Interest” shown in Exhibit B
      (without a proportionate increase in the Net Revenue Interest), all
      without increase during the life of such Wells except as stated in such
      Exhibit; and

              

      

       

      
        	
                (B)

              	
                That
      title of the Company to the Oil and Gas Properties is free and clear of
      liens, encumbrances and defects that materially and adversely affect the
      ownership, operation or use of the Oil and Gas Properties, except for
      Permitted Encumbrances.

              

      

       

      
        	
                (C)

              	
                As
      used herein, the term “Permitted Encumbrances” shall mean any one or more
      of the following:

              

      

       

      
        	
                 
      

              	
                (1)

              	
                Any
      lessor’s royalties, overriding royalties, net profits interests, carried
      interests, production payments, reversionary interests and similar burdens
      reflected in the public records, if the net cumulative effect of the
      burdens does not operate to reduce the Net Revenue Interest of the Company
      below the interests described in Exhibit
      B;

              

      

      

      
        	
                 
      

              	
                (2)

              	
                Any
      increase in lessor’s royalty occasioned by the repeal or suspension of any
      governmental regulation providing for the reduction of royalty for wells
      producing below defined threshold
amounts;

              

      

      

      
        	
                 
      

              	
                (3)

              	
                Division
      orders and production sales contracts terminable without penalty upon no
      more than ninety (90) days notice to the
  purchaser;

              

      

      

      
        	
                 
      

              	
                (4)

              	
                Preferential
      Rights and required third party consents to assignment and similar
      agreements with respect to which waivers or consents are obtained from the
      appropriate parties, or the appropriate time period for asserting any such
      right has expired without an exercise of the
  right;

              

      

      

      
        	
                 
      

              	
                (5)

              	
                Materialman’s,
      mechanic’s, repairman’s, employee’s, contractor’s, operator’s and other
      similar liens or charges arising in the ordinary course of business for
      obligations that are not delinquent and that will be paid and discharged
      in the ordinary course of business, or if delinquent, that are being
      contested in good faith by appropriate action of which Buyer is notified
      in writing before Closing;

              

      

       

      
        
           

        

        
          Page
9

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (6)

              	
                All
      rights to consent by, required notices to, filings with, or other actions
      by governmental entities in connection with the sale or conveyance of oil
      and gas leases or interests therein if they are routinely obtained
      subsequent to the sale or
conveyance;

              

      

      

      
        	
                 
      

              	
                (7)

              	
                Easements,
      rights-of-way, servitudes, permits, surface leases and other rights in
      respect of surface operations that do not materially interfere with the
      oil and gas operations to be conducted on any Well or
    Lease;

              

      

      

      
        	
                 
      

              	
                (8)

              	
                All
      operating agreements, unit agreements, unit operating agreements, pooling
      agreements and pooling designations affecting the Assets that are either
      (i) of record in the Company’s chain of title or (ii) reflected
      or referenced in the Records or (iii) included as Material Agreements
      on Schedule 7.1(K),
      to the extent the same do not decrease the Company’s Net Revenue Interests
      below the interests set forth on Exhibit B or
      increase the Company’s Working Interests above the interests set forth on
      Exhibit
      B;

              

      

      

      
        	
                 
      

              	
                (9)

              	
                Conventional
      rights of reassignment prior to release or surrender requiring notice to
      the holders of the rights;

              

      

      

      
        	
                 
      

              	
                (10)

              	
                All
      rights reserved to or vested in any governmental, statutory or public
      authority to control or regulate any of the Oil and Gas Properties in any
      manner, and all applicable laws, rules and orders of governmental
      authority;

              

      

      

      
        	
                 
      

              	
                (11)

              	
                Defects
      that are defensible by possession under applicable statutes of limitation
      for adverse possession or for
prescription;

              

      

      

      
        	
                 
      

              	
                (12)

              	
                All
      other liens, charges, encumbrances, contracts, agreements, instruments,
      obligations, defects and irregularities which results in an adjustment to
      the Base Purchase Price under Section
5.4.

              

      

      

      
        	
                 
      

              	
                (13)

              	
                All
      other liens, charges, encumbrances, contracts, agreements, instruments,
      obligations, defects and irregularities affecting the Oil and Gas
      Properties that individually or in the aggregate are not such as to
      materially interfere with or affect the operation, value or use of any of
      the Oil and Gas Properties and have not prevented, and cannot reasonably
      be expected to prevent, the Company from receiving the proceeds of
      production from the affected Oil and Gas
  Properties.

              

      

      

      5.3           Defect
Letters.

       

      
        	
                (A)

              	
                Buyer
      may from time to time and no later than September 25, 2008, at 5:00 p.m.,
      Central Time (the “Defect Notice Deadline”) notify Seller in writing (a
      “Notice”) of any matter which would cause title to all or part of the Oil
      and Gas Properties not to be Defensible Title (“Title
      Defect”).  There shall be no adjustment to the Base Purchase
      Price unless the aggregate Title Defect Values of all Title
      Defects exceed two percent (2%) of the Base Purchase Price (the
      “Title Defect Threshold”) (such amount being a threshold, not a
      deductible).  In order to provide Seller a reasonable
      opportunity to cure any Title Defects prior to Closing, Buyer shall use
      reasonable efforts to provide the Notice as soon as reasonably possible
      after becoming aware of or making its determination of the Title
      Defect.

              

      

       

      
        
           

        

        
          Page
10

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                In
      the Notice, Buyer must describe with reasonable detail each alleged Title
      Defect it has discovered and the steps required to cure each Title Defect,
      include Buyer’s reasonable estimate of the Title Defect Value attributable
      to each, and include all data and information in Buyer’s possession or
      control bearing thereon.  Except for Title Defects arising by,
      through or under the Company, Buyer shall be deemed to have conclusively
      waived all Title Defects not disclosed to Seller in a Notice on or before
      the Defect Notice Deadline.

              

      

       

      
        	
                (C)

              	
                Upon
      timely delivery of a Notice by
Buyer:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                within
      three (3) business days after Seller’s receipt of the Title Defects
      Notice, Seller shall notify Buyer whether Seller agrees with Buyer’s
      claimed Title Defects and/or the proposed Title Defect Values therefor
      (“Seller’s Response”).  If Seller does not agree with any
      claimed Title Defect and/or the proposed Title Defect Value therefor, then
      the Parties shall enter into good faith negotiations and shall attempt to
      agree on such matters;

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                within
      one (1) business day after Seller’s notice of its cure of a Title Defect,
      Buyer shall notify Seller whether Buyer agrees with Seller’s proposed cure
      of a Title Defect (“Buyer’s Response”).  All actions to attempt
      to cure a Title Defect shall be at Seller's expense.  If Buyer
      does not agree with any such cure, then the Parties shall enter into good
      faith negotiations and shall attempt to agree on such
    matters;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                if
      the Parties cannot reach agreement concerning either the existence of a
      Title Defect, Seller’s proposed cure of a Title Defect, or a Title Defect
      Value within ten (10) days after Buyer’s receipt of Seller’s Response or
      Seller’s receipt of Buyer’s Response, as applicable, upon either Party’s
      request, the Parties shall mutually agree on and employ an attorney
      experienced in title examination in the state where the Oil and Gas
      Properties are located (“Title Consultant”) to resolve all points of
      disagreement relating to Title Defects and Title Defect Values; provided
      that Seller or Buyer may elect to proceed to Closing with such Oil and Gas
      Property subject to the Title Defect becoming an Excluded Asset and adjust
      the Base Purchase Price in the amount of the Allocated Value and not
      submit such matter to arbitration;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                if
      at any time any Title Consultant so chosen fails or refuses to perform
      hereunder, a new Title Consultant shall be chosen by the
      Parties.  The cost of any such Title Consultant shall be borne
      one hundred percent (100%) by the party that does not
      prevail.  Each Party shall present a written statement of its
      position on the Title Defect and/or Title Defect Value in question to the
      Title Consultant within five (5) days after the Title Consultant is
      selected, and the Title Consultant shall make a determination of all
      points of disagreement in accordance with the terms and conditions of this
      Agreement within ten (10) business days of receipt of such position
      statements.  The determination by the Title Consultant shall be
      conclusive and binding on the Parties, and shall be enforceable against
      any Party in any court of competent jurisdiction.  If necessary,
      the Closing Date shall be deferred until the Title Consultant has made a
      determination of the disputed issues with respect thereto; provided,
      however, that, unless Seller and Buyer mutually agree to the contrary, the
      Closing Date shall not be deferred in any event for more than thirty (30)
      days beyond the scheduled Closing Date in Section 3.1.  Once the
      Title Consultant’s determination has been expressed to both Parties, if
      applicable, Seller shall have five (5) days in which to advise Buyer in
      writing which of the options available to Seller under Section 5.4 that
      Seller elects regarding each of the Oil and Gas Properties as to which the
      Title Consultant has made a determination.  In evaluating
      whether a Title Defect exists, due consideration shall be given to the
      length of time that the particular Oil and Gas Property has been producing
      Oil and Gas and whether such fact, circumstance or condition is of the
      type expected to be encountered in the area involved and is usual and
      customarily acceptable to reasonable and prudent operators, working
      interest owners and/or purchasers engaged in the business of the
      exploration, development, and operation of oil and gas
      properties.

              

      

       

      
        
           

        

        
          Page
11

          
            

          

        

        
           

        

      

       

      5.4           Effect of Title
Defect.

       

      
        	
                (A)

              	
                In
      the event Buyer provides Seller with a timely Notice and the Title Defects
      are valid and exceed the Title Defect Threshold, for those Title Defects
      not cured by Closing, Seller may, at its sole
  discretion:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                adjust
      the Base Purchase Price in the amount of the Title Defect Value of the Oil
      and Gas Property to which such Title Defect relates and proceed to Closing
      on all Oil and Gas Properties; or

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                proceed
      with (a) Closing on those Oil and Gas Properties not affected by the valid
      Title Defects and such Oil and Gas Properties to which a Title Defect
      relates but for which Seller has elected to proceed to Closing with an
      adjustment of the Base Purchase Price in the amount of the Title Defect
      Value of such Oil and Gas Properties, and (b) defer Closing on those
      other Oil and Gas Properties to which a Title Defect relates and for which
      Seller has elected to attempt to cure such Title Defect and to not proceed
      to Closing, for which Buyer shall place into escrow an amount equal to the
      Allocated Values of the Oil and Gas Properties affected by the valid Title
      Defects, which withheld amount shall be paid to Seller when the Oil and
      Gas Property affected by any valid Title Defect is cured or the Title
      Defect is waived by Buyer and the affected Oil and Gas Property is
      conveyed from Seller to Buyer.  If neither of the above occurs
      and if Seller later determines it will not cure a Title Defect on or
      before thirty (30) days from the Closing Date, the amount in the escrow
      account attributable to such Title Defect will be returned to Buyer and
      such Oil and Gas Property affected by such Title Defect shall be deemed an
      Excluded Asset and be transferred to Seller or Seller’s designee pursuant
      to Section 1.2.

              

      

       

      
        
           

        

        
          Page
12

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                The
      diminution in value of an Oil and Gas Property attributable to a valid
      Title Defect (the “Title Defect Value”) notified in a Notice shall be
      determined by the following:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                if
      the valid Title Defect asserted is that the actual Net Revenue Interest
      attributable to the producing or valued formation in any Oil and Gas
      Property is less than that stated in the applicable Exhibit, then the
      Title Defect Value is the product of the Allocated Value attributed to the
      affected formation(s) in such Oil and Gas Property, multiplied by a
      fraction, the numerator of which is the difference between the Net Revenue
      Interest set forth in the applicable Exhibit and the actual Net Revenue
      Interest, and the denominator of which is the Net Revenue Interest stated
      in the applicable Exhibit; or

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                if
      the valid Title Defect represents an obligation, encumbrance, burden or
      charge upon the affected Oil and Gas Property (including any increase in
      Working Interest for which there is not a proportionate increase in Net
      Revenue Interest), the amount of the Title Defect Value is to be
      determined by taking into account the Allocated Value of such Oil and Gas
      Property, the portion of the Oil and Gas Property affected by the Title
      Defect, the legal effect of the Title Defect, the potential economic
      effect of the Title Defect over the life of the affected Oil and Gas
      Property, and the Title Defect Values placed upon the Title Defect by
      Buyer and Seller.

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                Notwithstanding
      the above, in no event shall the total of the Title Defect Values related
      to a particular Oil and Gas Property exceed the Allocated Value of such
      Oil and Gas Property.

              

      

       

      
        	
                (C)

              	
                If
      the aggregate value of (i) the Base Purchase Price adjustment for
      Title Defect Values plus (ii) the Allocated Value of Oil and Gas
      Properties which are excluded in lieu of cure or adjustment equals or
      exceeds ten percent (10%) of the Base Purchase Price, then by notice
      delivered prior to the Closing either Party may terminate this Agreement
      and neither Party shall have any further obligation to conclude the
      transaction contemplated by this
Agreement.

              

      

       

      5.5           Consents. 
Seller
shall cause the Company to use its best efforts to obtain all required
consents.  If Buyer discovers other affected Oil and Gas Properties
during the course of Buyer’s due diligence activities, Buyer shall notify Seller
immediately and Seller shall cause the Company to use its best efforts to obtain
such consents prior to Closing.

       

      Except for consents and approvals which
are customarily obtained post-Closing, if a necessary consent to assign any
Lease has not been obtained as of the Closing, then (i) the portion of the
Oil and Gas Properties for which such consent has not been obtained shall become
an Excluded Asset conveyed to Seller or Seller’s designee at the Closing,
(ii) the Allocated Value for that Oil and Gas Property shall not be paid to
Seller, and (iii) Seller shall use best efforts to obtain such consent as
promptly as possible following Closing.  If such consent has been
obtained as of the date on which the Post-Closing Adjustment Statement becomes
final, Seller shall convey the affected Oil and Gas Property to the Company
effective as of the Effective Time and Buyer shall pay Seller the Allocated
Value of the affected Oil and Gas Property, less any proceeds from the affected
Oil and Gas Property received by Seller attributable to the period of time after
the Effective Time (calculated in accordance with Section 2.3).  If
such consent has not been obtained or has not been waived by Buyer as of the
date on which the Post-Closing Adjustment Statement becomes final, Seller shall
elect either to (i) challenge in court the enforceability of such consent
right, in which event the affected Oil and Gas Property shall be assigned to
Seller as an Excluded Asset and a portion of the Purchase Price equal to the
Allocated Value of the affected Oil and Gas Property shall be withheld by Buyer
until such legal challenge is finally resolved by settlement or non-appealable
court order, after which Seller shall convey the affected Oil and Gas Property
to the Company under the terms of this Agreement and Buyer shall pay the
Allocated Value for such Oil and Gas Property, less any proceeds received by
Seller attributable to such Oil and Gas 

       

      
        
           

        

        
          Page
13

          
            

          

        

        
           

        

      

       

      Property
for the period from and after the Effective Time (calculated in accordance with
Section 2.3) or (ii)  deem the affected Oil and Gas Property an Excluded
Asset and the Base Purchase Price shall be reduced by an amount equal to the
Allocated Value of the affected Oil and Gas Property (with such adjustment being
an “Exclusion Adjustment”).  Buyer shall reasonably cooperate with
Seller in obtaining any required consent including providing assurances of
reasonable financial conditions, but Buyer shall not be required to expend funds
or make any other type of financial commitments a condition of obtaining such
consent.

       

      6.           ENVIRONMENTAL
ASSESSMENT.

       

      6.1           Physical Condition of the
Oil and Gas
Properties.

       

      
        	
                (A)

              	
                Buyer
      acknowledges that the Oil and Gas Properties have been used for oil and
      gas drilling and production operations and possibly for the storage and
      disposal of waste materials or hazardous substances related to standard
      oil field operations.  Physical changes in or under the Oil and
      Gas Properties or adjacent lands may have occurred as a result of such
      uses.  The Oil and Gas Properties also may contain previously
      plugged and abandoned wells, buried pipelines, storage tanks and other
      equipment, whether or not of a similar nature, the locations of which may
      not now be known by Seller or be readily apparent by a physical inspection
      of the Oil and Gas Properties.  Upon consummation of the Closing
      Buyer shall be deemed to have assumed the risk of expense, claim, damage
      or liability arising from any such matter referred to in this section,
      including without limitation the risk that the Oil and Gas Properties may
      contain waste or contaminants and that adverse physical conditions,
      including the presence of waste or contaminants, may not have been
      revealed by Buyer’s investigation.  Upon consummation of the
      Closing the Company shall retain all responsibility and liability related
      to disposal, spills, waste or contamination on or below the Oil and Gas
      Properties.

              

      

       

      
        	
                (B)

              	
                In
      addition, Buyer acknowledges that some oil field production equipment
      located on the Oil and Gas Properties may contain asbestos and/or
      naturally-occurring radioactive material (“NORM”).  In this
      regard, Buyer expressly understands that NORM may affix or attach itself
      to inside of wells, materials and equipment as scale or in other forms,
      and that wells, materials and equipment located on the Oil and Gas
      Properties described herein may contain NORM and that NORM-containing
      materials may be buried or have been otherwise disposed of on the Oil and
      Gas Properties.  Buyer also expressly understands that special
      procedures may be required for the removal and disposal of asbestos and
      NORM from the Oil and Gas Properties where it may be found, and that upon
      consummation of the Closing the Company shall be deemed to have retained
      all liability when such activities are
performed

              

      

       

      
        
           

        

        
          Page
14

          
            

          

        

        
           

        

      

       

      6.2           Inspection and
Testing.

       

      
        	
                (A)

              	
                Prior
      to Closing, Buyer shall have the right, at its sole cost and risk, to
      review Seller’s or the Company’s Phase I environmental assessments of the
      Oil and Gas Properties, if any exist, and to conduct any further
      environmental assessment of the Oil and Gas Properties it deems
      appropriate, to the extent that Seller or the Company has the authority to
      grant such right to Buyer.  Buyer shall immediately provide to
      Seller any data obtained from such assessments, including any reports and
      conclusions.  Seller, the Company and Buyer shall keep all
      information relating to such assessments strictly confidential whether or
      not Closing occurs, except as may be required pursuant to any
      Environmental Laws.

              

      

       

      
        	
                (B)

              	
                Buyer
      waives and releases all claims against Seller, the Company, their
      Affiliates, and each of their respective directors, officers, employees,
      agents, and other representatives and their successors and assigns
      (collectively, the “Seller’s Group”), for injury to or death of persons,
      or damage to property, arising in any way from the exercise of rights
      granted to Buyer in Section 6.2(A) above or the activities of Buyer or its
      employees, agents or contractors on the Oil and Gas Properties pursuant to
      Section 6.2(A) above.  EXCEPT TO THE EXTENT CAUSED BY THE GROSS
      NEGLIGENCE OR WILLFUL MISCONDUCT OF THE SELLER’S GROUP, BUYER SHALL
      INDEMNIFY THE SELLER’S GROUP AGAINST AND HOLD THE MEMBERS OF THE SELLER’S
      GROUP HARMLESS FROM ANY AND ALL REASONABLE LOSS, COST, DAMAGE, EXPENSE OR
      LIABILITY, INCLUDING REASONABLE ATTORNEY’S FEES, WHATSOEVER ARISING OUT OF
      (I) ANY AND ALL STATUTORY OR COMMON LAW LIENS OR OTHER ENCUMBRANCES FOR
      LABOR OR MATERIALS FURNISHED IN CONNECTION WITH SUCH TESTS, SAMPLINGS,
      STUDIES OR SURVEYS AS BUYER MAY CONDUCT WITH RESPECT TO THE OIL AND GAS
      PROPERTIES; AND (II) ANY INJURY TO OR DEATH OF PERSONS OR DAMAGE TO
      PROPERTY OCCURRING IN, ON OR ABOUT THE OIL AND GAS PROPERTIES AS A RESULT
      OF SUCH EXERCISE OR ACTIVITIES.

              

      

       

      
        	
                (C)

              	
                “Environmental
      Laws” means all applicable local, state, and federal laws, rules,
      regulations, and orders regulating or otherwise pertaining to:
      (i) the use, generation, migration, storage, removal, treatment,
      remedy, discharge, release, transportation, disposal, or cleanup of
      pollutants, contamination, hazardous wastes, hazardous substances,
      hazardous materials, toxic substances or toxic pollutants;
      (ii) surface waters, ground waters, ambient air and any other
      environmental medium on or off any Lease; or (iii) the environment,
      habitat protection or health and safety-related matters; including the
      following as from time to time amended and all others whether similar or
      dissimilar: the Comprehensive Environmental Response, Compensation, and
      Liability Act of 1980, as amended by the Superfund Amendments and
      Reauthorization Act of 1986, the Resource Conservation and Recovery Act of
      1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste
      Disposal Act Amendments of 1980, and the Hazardous and Solid Waste
      Amendments of 1984, the Hazardous Materials Transportation Act, the Toxic
      Substance Control Act, the Clean Air Act, the Clean Water Act, the Safe
      Drinking Water Act, the National Environmental Policy Act, the Endangered
      Species Act, the Oil Pollution Act of 1990, and all regulations
      promulgated pursuant thereto.

              

      

       

      
        
           

        

        
          Page
15

          
            

          

        

        
           

        

      

       

      6.3           Notice of Adverse
Environmental Conditions.  No
later than the Defect Notice Deadline, Buyer shall notify Seller in writing of
any Adverse Environmental Condition with respect to the Oil and Gas
Properties.  Such notice shall describe in reasonable detail the
Adverse Environmental Condition and include the estimated Environmental Defect
Value attributable thereto (the “Environmental Defect Notice”) based on an
estimate of the cost to Remediate the Adverse Environmental
Condition.  There shall be no adjustment to the Base Purchase Price
unless the aggregate Environmental Defect Values of all Adverse Environmental
Conditions exceeds one percent (1%) of the Base Purchase Price (the
“Environmental Defect Threshold”) (such amount being a threshold, not a
deductible).  The “Environmental Defect Value” attributable to any
Adverse Environmental Condition shall be the estimated amount (net to the
Company’s interest) of all reasonable costs and claims necessary to Remediate
the Adverse Environmental Conditions, as reasonably determined and estimated by
Buyer.  The term “Adverse Environmental Condition” means (i) the
failure of the Oil and Gas Properties to be in material compliance with all
applicable Environmental Laws; (ii) the Oil and Gas Properties being
subject to any agreements, consent orders, decrees or judgments currently in
existence based on any Environmental Laws that negatively and materially impact
the future use of any portion of the Oil and Gas Properties or that require any
material change in the present conditions of any of the Oil and Gas Properties;
or (iii) the Oil and Gas Properties being subject to any material uncured
violations of or non-compliance with any applicable Environmental Laws or any
Lease or agreement.  Buyer shall be deemed to have conclusively waived
(i) all Adverse Environmental Conditions not contained in an Environmental
Defect Notice delivered to Seller on or before the Defect Notice Deadline, and
(ii) any remedy against Seller for Adverse Environmental Conditions if the
Environmental Defect Value of all Adverse Environmental Conditions do not exceed
the Environmental Defect Threshold.

       

      6.4           Rights and Remedies for
Adverse Environmental Conditions.

       

      
        	
                (A)

              	
                With
      respect to any Adverse Environmental Conditions affecting one or more of
      the Oil and Gas Properties which exceed the Environmental Defect
      Threshold, Seller may on an property-by-property basis (i) cause
      Company at Seller’s expense to remediate the Adverse Environmental
      Conditions to Buyer’s reasonable satisfaction prior to Closing, but Seller
      shall have no obligation to do so, and proceed to Closing with no
      adjustment of the Base Purchase Price; (ii) proceed to Closing and
      adjust the Base Purchase Price in an amount equal to the applicable
      Environmental Defect Value; or (iii) deem the affected Oil and Gas
      Property an Excluded Asset and reduce the Base Purchase Price by the
      Allocated Value of the affected Oil and Gas Property (“Exclusion
      Adjustment”).

              

      

       

      
        	
                (B)

              	
                Buyer
      waives any Adverse Environmental Condition for which Buyer has received an
      adjustment to the Base Purchase Price in accordance with Section
      6.4(A).

              

      

       

      
        	
                (C)

              	
                If
      Buyer delivers a valid Environmental Defect Notice to Seller and if the
      aggregate of the Environmental Defects claimed is less than the
      Environmental Defect Threshold, Buyer will be deemed to have accepted the
      Oil and Gas Properties “where-is, as-is” with respect to all Adverse
      Environmental Conditions in, on or under the Oil and Gas
      Properties.  The Environmental Defect Threshold is a threshold
      and not a deductible.  The Environmental Defect Threshold and
      the Title Defect Threshold are separate and distinct and operate
      independently.

              

      

       

      
        
           

        

        
          Page
16

          
            

          

        

        
           

        

      

       

      
        	
                (D)

              	
                If
      the aggregate value of (i) the Base Purchase Price adjustment for
      Adverse Environmental Conditions plus (ii) any Exclusion Adjustments
      in lieu of Remediating any Adverse Environmental Conditions equals or
      exceeds ten percent (10%) of the Base Purchase Price, either Party may
      terminate this Agreement and neither Party shall have any further
      obligation to conclude the transfer of the Oil and Gas Properties under
      this Agreement.

              

      

       

      
        	
                (E)

              	
                The
      term “Remediate” or “Remediation” means, with respect to any valid Adverse
      Environmental Condition, causing the Company at Seller’s expense to
      undertake and complete those actions and activities necessary to eliminate
      or correct such Adverse Environmental Condition to the degree sufficient
      that such Adverse Environmental Condition no longer constitutes an Adverse
      Environmental Condition as defined above.  Seller shall promptly
      notify Buyer at such time as it believes that it has Remediated an Adverse
      Environmental Condition.  Buyer shall promptly notify Seller
      whether it agrees such condition is Remediated.  If Buyer fails
      to notify Seller of its determination with respect to such Remediation
      within ten (10) business days following Seller’s notice, such Adverse
      Environmental Condition shall be deemed
  Remediated.

              

      

       

      
        	
                (F)

              	
                If
      Seller and Buyer are unable to agree on the amount of the Environmental
      Defect Value within ten (10) business days after Seller’s receipt of the
      Environmental Defect Notice or that an Adverse Environmental Condition
      exists, has been Remediated or is required to be Remediated, then the
      dispute will be submitted to a mutually acceptable company with recognized
      expertise in the oil and gas environmental remediation and regulation
      field (the “Environmental Consultant”) whose determination shall be final
      and binding upon the Parties.  Seller and Buyer shall each bear
      their respective costs and expenses incurred in connection with any such
      dispute, and one-half (1/2) of the fees, costs and expenses charged by the
      Environmental Consultant.  Each Party shall present a written
      statement of its position on the Adverse Environmental Condition and/or
      the Environmental Defect Value in question to the Environmental Consultant
      within five (5) business days after the Environmental Consultant is
      selected, and the Environmental Consultant shall make a determination of
      all points of disagreement in accordance with the terms and conditions of
      this Agreement within ten (10) business days of receipt of such position
      statements.  If necessary, the Closing Date shall be deferred
      until the Environmental Consultant has made a determination of the
      disputed issues with respect thereto; provided, however, that, unless
      Seller and Buyer mutually agree to the contrary, the Closing Date shall
      not be deferred in any event for more than thirty (30) days beyond the
      scheduled Closing Date in Section 3.1.  Once the Environmental
      Consultant’s determination has been expressed to both Parties, if
      applicable, Seller shall have five (5) business days in which to advise
      Buyer in writing which of the options available to Seller under Section
      6.4(A) Seller elects regarding each of the Oil and Gas Properties as to
      which the Environmental Consultant has made a
    determination.

              

      

       

      
        
           

        

        
          Page
17

          
            

          

        

        
           

        

      

       

      6.5           Remediation by
Seller.  If
Seller elects to Remediate an Adverse Environmental Condition or is required by
a governmental or regulatory agency to Remediate an Adverse Environmental
Condition, the following will govern the Remediation:

       

      
        	
                (A)

              	
                Seller
      shall be responsible for all negotiations and contacts with federal,
      state, and local agencies and authorities.  Buyer may not make
      any independent contacts with any agency, authority, or other third party
      with respect to the Adverse Environmental Condition or Remediation and
      shall keep all information regarding the Adverse Environmental Condition
      and Remediation confidential, except in each instance to the extent
      required by applicable law.

              

      

       

      
        	
                (B)

              	
                Seller
      shall Remediate the Adverse Environmental Condition to the level agreed
      upon by Seller and Buyer (or failing such agreement to the level
      determined by the Environmental Consultant), but in no event shall Seller
      be required to Remediate the Adverse Environmental Condition beyond the
      level required by the applicable Environmental Laws, Lease or agreement in
      effect at the Effective Time.

              

      

       

      
        	
                (C)

              	
                Buyer
      shall grant and warrant access and entry to the Oil and Gas Properties
      after Closing to Seller and third parties conducting assessments or
      Remediation, to the extent and as long as necessary to conduct and
      complete the assessment or Remediation work, to remove equipment and
      facilities, and to perform any other activities reasonably necessary in
      connection with assessment or
Remediation.

              

      

       

      
        	
                (D)

              	
                Buyer
      shall facilitate Seller’s ingress and egress or assessment or Remediation
      activities after the Closing.  Seller shall make reasonable
      efforts to perform the work so as to minimize disruption to Buyer’s and
      the Company’s business activities.

              

      

       

      
        	
                (E)

              	
                Seller
      shall continue Remediation of the Adverse Environmental Condition until
      the first of the following occurs:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                the
      appropriate governmental authorities provide notice to Seller or Buyer
      that no further Remediation of the Adverse Environmental Condition is
      required; or

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                the
      Adverse Environmental Condition has been Remediated to the level required
      by the applicable Environmental Laws, Lease or agreement, or as agreed by
      the Parties.

              

      

       

      Upon the
occurrence of either (i) or (ii) above, Seller shall notify Buyer that
Remediation of the Adverse Environmental Condition is complete and provide a
copy of the notification described in (i) above, if
applicable.  Upon delivery of said notice, Seller shall be released
from all liability and have no further obligations under any provisions of this
Agreement in connection with an Adverse Environmental Condition.

      

      
        	
                (F)

              	
                Until
      Seller completes Remediation of an Adverse Environmental Condition, Seller
      and Buyer shall each notify the other of any pending or threatened claim,
      action, or proceeding by any authority or private party that relates to or
      would affect the environmental condition, the assessment, or the
      Remediation of the Oil and Gas
Properties.

              

      

       

      
        
           

        

        
          Page
18

          
            

          

        

        
           

        

      

       

      7.           REPRESENTATIONS AND
WARRANTIES OF SELLER.

       

      7.1           Seller’s Representations and
Warranties.  Seller
represents and warrants to Buyer the following as of the date of execution of
this Agreement and the Closing:

       

      
        	
                (A)

              	
                Status. The
      Company is a limited liability company and Seller is a corporation, each
      duly organized, legally existing and in good standing under the laws of
      the State of Texas, and duly qualified to own its properties and assets
      and carry on its business as now being
  conducted.

              

      

       

      
        	
                (B)

              	
                Authority.  Each
      of Seller and the Company has the requisite power and authority to enter
      into this Agreement, to carry out the transactions contemplated hereby and
      to undertake all of the obligations of Seller set forth in this
      Agreement.

              

      

       

      
        	
                (C)

              	
                Validity of
      Obligations.  The execution, delivery and performance of
      this Agreement and the transactions contemplated hereby have been duly and
      validly authorized by all requisite action on the part of Seller and the
      Company, each as required under its formation documents.  This
      Agreement and any documents or instruments delivered by each of Seller and
      the Company shall constitute legal, valid and binding obligations of
      Seller and the Company enforceable in accordance with their terms subject,
      however, to the effects of bankruptcy, insolvency, reorganization,
      moratorium and other laws for the protection of creditors, as well as to
      general principles of equity, regardless of whether such enforceability is
      considered in a proceeding in equity or at
law.

              

      

       

      
        	
                (D)

              	
                No
      Violation.  The execution and delivery of this Agreement
      by Sellers and the Company does not, and the fulfillment of and compliance
      with the terms and conditions hereof will not, as of Closing, violate, or
      be in conflict with, any provision of the governing documents of Seller or
      the Company, or any statute, rule or regulation applicable to Seller or
      the Company or any agreement or instrument to which Seller or the Company
      is a party or by which it is bound, or, to Seller’s knowledge, violate, or
      be in conflict with any judgment, decree or order applicable to Seller or
      the Company or require the approval or consent of any third
      party.

              

      

       

      
        	
                (E)

              	
                AFE’s.  With
      respect to the joint, unit or other operating agreements relating to the
      Oil and Gas Properties, except as set forth in Schedule 7.1(E),
      there are no outstanding calls or payments under authorities for
      expenditures for payments relating to the Oil and Gas Properties which are
      due or which the Company has committed to make which have not been
      made.

              

      

       

      
        	
                (F)

              	
                Contractual
      Restrictions.  The Company has not entered into any
      contracts for or received prepayments, take-or-pay arrangements, buydowns,
      buyouts for Oil and Gas, or storage of the same relating to the Oil and
      Gas Properties which the Company shall be obligated to honor after Closing
      and make deliveries of Oil and Gas without receiving full payment therefor
      or pay refunds of amounts previously paid under such contracts or
      arrangements.

              

      

       

      
        	
                (G)

              	
                Litigation.  Except
      as set forth in Schedule 7.1(G),
      there is no suit, action or proceeding pending or, to Seller’s knowledge,
      threatened against Seller, the Company or the Oil and Gas Properties that
      could have an adverse affect upon the Company or the ownership, operation
      or value of any of the Oil and Gas
Properties.

              

      

       

      
        
           

        

        
          Page
19

          
            

          

        

        
           

        

      

       

      
        	
                (H)

              	
                Permits and
      Consents.  The Company has (i) acquired all material
      permits, licenses, approvals and consents from appropriate governmental
      bodies, authorities and agencies to conduct its business and to own, use
      and operate the Oil and Gas Properties and its other assets in compliance
      with applicable laws, rules, regulations, ordinances and orders; and
      (ii) is in material compliance with all such permits, licenses,
      approvals and consents.

              

      

       

      
        	
                (I)

              	
                Broker’s
      Fees.  Neither the Company nor Seller has incurred any
      obligation or liability, contingent or otherwise, for brokers’ or finders’
      fees in respect of the matters provided for in this Agreement for which
      the Company or Buyer shall have any
  responsibility.

              

      

       

      
        	
                (J)

              	
                Taxes.   The
      Company has filed all federal, state, local and foreign tax returns and
      reports required to be filed by it and has paid and discharged, or
      established adequate reserves for, all taxes shown as due thereon or
      otherwise owed by the Company when due (including without limitation all
      Property Taxes, Severance Taxes, income, gross receipts, payroll,
      employment, excise, franchise, withholding, social security, unemployment,
      disability, sales, use, transfer or other taxes), and has made all
      required estimated tax deposits, other than such payments as are being
      contested in good faith by appropriate proceedings.  No taxing
      authority or agency is now asserting or, to the best knowledge of the
      Company and the Sellers, threatening to assert against the Company any
      deficiency or claim for additional taxes or interest thereon or penalties
      in connection therewith.  The Company has not granted any waiver
      of any statute of limitations with respect to, or any extension of a
      period for the assessment of, any federal, state, county, municipal or
      foreign income tax.

              

      

       

      
        	
                (K)

              	
                Material
      Agreements.

              

      

       

      
        	
                 
      

              	
                (i)

              	
                To
      the best of Seller’s and Company’s knowledge, all material contracts,
      leases, plans and other arrangements to which the Company is a party or by
      which it or its assets, including without limitation the Oil and Gas
      Properties, are bound or subject to, are listed on Schedule 7.1(K)
      (“Material Agreements”).  Seller and the Company have provided
      Buyer with access to true, correct and complete copies of all written
      Material Agreements and all amendments, modifications and supplements
      thereto.  All of the Material Agreements are in
      writing.  To the knowledge of Seller and the Company, the
      Company's relationships are generally satisfactory with its suppliers and
      vendors who are material to the conduct of the Company’s
      business.  The Company does not have outstanding any powers of
      attorney with any Person.  Each of the Material Agreements to
      which the Company is a signatory has been duly executed by the Company and
      the Company is not in breach of any Material
  Agreement.

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                To
      the best of Seller’s and Company’s knowledge, the Company has
      performed in all
      material respects each material term, covenant and condition of
      each of the Material Agreements to which it is a party or by which it is
      bound, and, to the knowledge of Seller and the Company, no material event
      of default on the part of any other party thereto exists under any of the
      Material Agreements.  The Company is current on all payment
      obligations under all Material Agreements to which it is a party or by
      which it is bound.

              

      

       

      
        
           

        

        
          Page
20

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (iii)

              	
                To
      the best of Seller’s and Company’s knowledge,  no event has
      occurred under any of the Material Agreements that would constitute a
      material default thereunder on the part of any other party
      thereto.  The consummation of the transaction contemplated by
      this Agreement will not result in a default, violation, termination or
      right to terminate under any of the Material
  Agreements.

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                To
      the best of Seller’s and Company’s knowledge, each of the Material
      Agreements is valid, binding, enforceable and in full force and effect,
      unimpaired by any acts or omissions of the Company or its officers,
      managers and agents, and constitutes the legal and binding obligation of
      the Company in accordance with its terms, except that (i) such enforcement
      may be subject to bankruptcy, insolvency, reorganization, moratorium or
      other similar laws or judicial decisions now or hereafter in effect
      relating to creditors' rights generally, and (ii) the remedy of specific
      performance and injunctive relief may be subject to equitable defenses and
      to the discretion of the court before which any proceeding therefor may be
      brought.

              

      

       

      
        	
                (L)

              	
                No
      Default.  The Company is not in default, breach or
      violation (and no event has occurred which, with notice or the lapse of
      time or both, would constitute a default or violation) of any term,
      condition or provision of (i) the Company’s organizational documents;
      (ii) any note, bond, mortgage, indenture, license, agreement or other
      instrument or obligation to which the Company is now a party or by which
      the Company or any of its properties, business or assets is bound;
      (iii) any order, writ, injunction, decree, statute, rule or
      regulation applicable to the Company; or (iv) any
    Lease.

              

      

       

      
        	
                (M)

              	
                Consents and
      Preferential Purchase Rights.  To the best of Seller’s
      knowledge, Schedule 7.1(M)
      lists all consents and preferential purchase rights contained in the
      Leases or Material Agreements.

              

      

       

      
        	
                (N)

              	
                Gas
      Imbalances.  There are no gas imbalances with respect to
      the Oil and Gas Properties as of the Effective
  Time.

              

      

       

      
        	
                (O)

              	
                Royalties.  All
      rentals, royalties and other payments due under the Leases have been
      properly paid, except those amounts properly being held in
      suspense.

              

      

       

      
        	
                (P)

              	
                Production Sales
      Contracts.  There are no production sales contracts
      pertaining to the Oil and Gas Properties that provide for a fixed price
      and that cannot be cancelled at any time upon ninety (90) days (or less)
      prior notice.

              

      

       

      
        	
                (Q)

              	
                Calls on
      Production.  There are no calls on production pertaining
      to the Oil and Gas Properties that provide for payment at less than
      applicable current market prices.

              

      

       

      
        
           

        

        
          Page
21

          
            

          

        

        
           

        

      

      

      
        	
                (R)

              	
                Compliance with
      Laws.  To Seller’s knowledge, the Company’s ownership and
      operation of the Oil and Gas Properties has been in compliance with all
      applicable statutes, laws, rules and regulations, except to the extent any
      non-compliance would not have a material adverse affect on the ownership,
      value or operation of the Oil and Gas
  Properties.

              

      

       

      
        	
                (S)

              	
                No
      Subsidiaries.  The Company has no subsidiaries, and does
      not own, directly or indirectly, any capital stock or other ownership,
      participation or equity interest in any corporation, partnership, limited
      liability company, association, joint venture or other entity , and (b)
      there are no outstanding contractual obligations or commitments of the
      Company to acquire or make any investment in any shares of capital stock
      or other ownership, participation or equity interest in any corporation,
      partnership, limited liability company, association, joint venture or
      other entity.

              

      

       

      
        	
                (T)

              	
                Capital
      Structure.  The Company has no outstanding options,
      appreciation rights, phantom units, profit participation or similar rights
      with respect to the Company. No shares of capital stock or other equity or
      voting securities of the Company are reserved for issuance or are
      outstanding. The Membership Interests are duly authorized, validly issued,
      fully paid and nonassessable and have not been issued in violation of any
      preemptive rights or in violation of state or federal securities laws, and
      there are no preemptive rights with respect thereto. Except for the
      Membership Interests, there are no outstanding or authorized securities,
      options, warrants, calls, rights, commitments, preemptive rights,
      agreements, arrangements or undertakings of any kind to which the Company
      is a party, or by which it is bound, obligating the Company to issue,
      deliver or sell, or cause to be issued, delivered or sold, any equity or
      voting securities of, or other ownership interests in, the Company or
      obligating the Company to issue, grant, extend or enter into any such
      security, option, warrant, call, right, commitment, agreement, arrangement
      or undertaking. There are not as of the date of this Agreement and there
      will not be at the Closing Date any buy-sell agreements, voting trusts or
      other agreements or understandings to which the Company is a party or by
      which it is bound relating to the voting of any securities of the
      Company.  The Membership Interests constitute all of the issued
      and outstanding equity securities or other ownership interests of the
      Company.  Except for the purchase and sale of the Company Shares
      pursuant to this Agreement, there are no outstanding claims, options or
      other rights of any person to purchase from Seller, and no contracts or
      commitments providing for the granting of rights to acquire, any of the
      Membership Interests.  There are no claims pending or, to the
      knowledge of Seller and the Company, threatened, against the Company or
      Seller that concern or affect title to the Membership Interests, or that
      seek to compel the issuance of any securities of the
      Company.  There are no outstanding obligations in connection
      with the redemption by the Company of any of the previously issued and
      outstanding securities of the
Company.

              

      

       

      
        	
                (U)

              	
                Title to Membership
      Interests.  With the exception of the liens that will be
      released at closing, Seller has legal, beneficial and record title to all
      of the Membership Interests, free and clear of any and all liens,
      restrictions, options, voting trusts or agreements, proxies, encumbrances,
      interests, claims or charges of any kind whatsoever and all such
      Membership Interests are validly issued, fully paid and
      nonassessable.  Seller has or will have at the Closing physical
      custody of any certificates evidencing all of the Membership
      Interests.  At Closing, Buyer will acquire good and defensible
      title to the Membership Interests, free and clear of any and all liens,
      restrictions, options, voting trusts or agreements, proxies, encumbrances,
      claims, interests or charges of any
kind.

              

      

       

      
        
           

        

        
          Page
22

          
            

          

        

        
           

        

      

       

      
        	
                (V)

              	
                Title to and Condition
      of Non-Oil and Gas Properties.  The Company does not
      have, and has not ever had, any assets other than the Oil and Gas
      Properties and the Records.  The Records are free and clear of
      all liens, claims and other encumbrances, have been maintained in
      accordance with industry standards and are not subject to any restrictions
      with respect to the transferability
thereof.

              

      

       

      
        	
                (W)

              	
                Oil and Gas
      Properties.  Subject to the title review process set
      forth in Article 5, the Company has Good and Defensible Title to the
      Oil and Gas Properties.  There is no pending condemnation or
      similar proceeding affecting the Oil and Gas Properties or any portion
      thereof, and, to the knowledge of Seller and the Company, no such action
      is presently threatened. All oil and gas leases and agreements
      constituting a part of the Oil and Gas Properties are valid and
      subsisting, in full force and effect and, to the knowledge of Seller and
      the Company there exists no default or event or circumstances which with
      the giving of notice or the passage of time or both would give rise to a
      default under any such lease or agreement which would materially interfere
      with the operation, value or use of the Company's assets or properties.
      The Company has performed in all material respects each material term,
      covenant and condition of each of the
Leases.

              

      

       

      
        	
                (X)

              	
                Financial
      Statements.  The Company and Sellers have provided to
      Buyer true and complete copies of the unaudited balance sheets of the
      Company as of December 31, 2006 and 2007 and as of June 30, 2008, and
      the related unaudited statements of operations and changes in Members’
      equity for the two fiscal years and six month period then ended
      (collectively, the "Financial Statements"). The Financial Statements (i)
      have been prepared utilizing generally accepted accounting principles in
      the United States consistently applied; (ii) present fairly, in all
      material respects, the financial condition of the Company as of the dates
      thereof and the results of its operations for the periods then ended; and
      (iii) are consistent with the books and records of the Company, which
      books and records are true, correct and complete in all material
      respects.

              

      

       

      
        	
                (Y)

              	
                No Undisclosed
      Liabilities.  At Closing, the Company will have no debt,
      liability or obligation of any kind, whether accrued, absolute,
      contingent, inchoate, determined, determinable or otherwise, except for
      (i) liabilities or obligations incurred in the ordinary course of business
      which, individually or in the aggregate would not have a material adverse
      effect on the Company, (ii) liabilities or obligations under this
      Agreement or incurred in connection with the transactions contemplated
      hereby, or (iii) liabilities or obligations disclosed in the
      Financial Statements.

              

      

       

      
        
           

        

        
          Page
23

          
            

          

        

        
           

        

      

       

      
        	
                (Z)

              	
                No Material
      Changes.  Since June 30, 2008 the Company has
      conducted its business only in the ordinary course consistent with past
      practices and there has not been: (a) any amendment or change in the
      organizational documents or equity securities of the Company, (b) any
      repurchase, redemption or other acquisition by the Company of any
      securities of, or other ownership interests in the Company, (c) any change
      in any method of accounting or accounting practice or any tax method,
      practice or election by the Company, (d) any sale, assignment or other
      disposition of any material asset, (e) any commitment or dispute that
      would reasonably be expected to have a material adverse effect on the
      Company, (f) any material adverse change in the financial condition,
      operations, assets, liabilities or business of the Company or any material
      change in the general and administrative expenses of the Company; (g) any
      declaration, setting aside, or payment of any dividend or other
      distribution in respect of the Company’s capital stock or other equity
      securities, (h) any labor or employment dispute of whatever nature or any
      bonuses paid or material change in employee compensation or benefits, (i)
      any investment or loan made by the Company, (j) any lien, claim or other
      encumbrance (except Permitted Encumbrances) created on any asset of the
      Company, (k) any indebtedness incurred by the Company, (l) any transaction
      with any Affiliate of the Company, (m) any material transaction or
      agreement entered into or amended by the Company, (n) any action which
      would have been prohibited under Sections 9.1 and 9.2 hereof,
      (o) any discharge or satisfaction of any lien, claim or other
      encumbrance or payment of  any obligation or liability, absolute
      or contingent, other than current liabilities incurred and paid in the
      ordinary course of business and consistent with past practices, (p) any
      delay or postponement in the payment of accounts payable or other
      liabilities (except those disputed consistent with industry practices),
      (q) any issuance, sale, or other disposition of any membership interests
      or other securities of the Company or any grant of any rights or options
      to purchase or obtain (including upon conversion, exchange, or exercise)
      any securities of the Company, (r) any action to make or commit to make
      any single (or series of related) capital expenditure in excess of
      $50,000, (s) any agreements entered into with respect to any hedging
      transaction which remains open, (t) any material damage, destruction, or
      loss, whether or not covered by insurance, affecting any material assets
      or properties of the Company, (u) any default, or event which with the
      lapse of time or giving of notice would constitute a default, of the
      Company under any indebtedness or other obligation of the Company, or (v)
      any other event or condition known to the Company or Seller that might
      have a material adverse effect on the
Company.

              

      

       

      
        	
                (AA)

              	
                Insurance.  The
      Company has in full force and effect the liability and casualty insurance,
      and workers compensation, as described in Schedule 7.1(AA).  The
      Company is not in default in any material respect with respect to such
      insurance policies, and the Company has not failed to give any notice or
      present any claim under any policies in due and timely
      fashion.  All insurance claims currently pending or made within
      two years prior to the date hereof are described on Schedule 7.1(AA).

              

      

       

      
        	
                (BB)

              	
                Bank
      Accounts.  All bank or other financial institution
      accounts of the Company are described in Schedule 7.1(BB),
      and such Schedule also lists all persons with check writing authority on
      behalf of the Company.

              

      

       

      
        	
                (CC)

              	
                Employees.  The
      Company does not have and has not ever had any employees, and does not
      have and has not ever had (1) any employee welfare benefit plan or
      employee pension benefit plan as defined in sections 3(1) and 3(2) of the
      Employee Retirement Income Security Act of 1974, as amended (“ERISA”), or
      (2) any other employee benefit agreement or arrangement that is not an
      ERISA plan, including any deferred compensation plan, incentive plan,
      bonus plan or arrangement, stock option plan, stock purchase plan, stock
      award plan, golden parachute agreement, severance pay plan, dependent care
      plan, flexible benefit plan, cafeteria plan, employee assistance program,
      scholarship program, employment contract, retention incentive agreement,
      noncompetition agreement, consulting agreement, confidentiality agreement,
      vacation policy, or other similar plan or agreement or
      arrangement.

              

      

       

      
        
           

        

        
          Page
24

          
            

          

        

        
           

        

      

       

      
        	
                (DD)

              	
                Environmental
      Compliance.  To the knowledge of Seller and Company,
      subject to the environmental assessment procedure set forth in
      Article 6,

              

      

       

      
        	
                 
      

              	
                (i)

              	
                the
      Company has complied in all material respects with all Environmental Laws,
      and there is no existing action, suit, proceeding, hearing, investigation,
      charge, complaint, claim, demand, or notice filed, commenced or, to the
      knowledge of Seller and the Company, threatened against the Company or any
      of its assets which: (a) asserts or alleges that the Company violated
      any Environmental Laws; (b) asserts or alleges that the Company is
      required to clean up, remove or take remedial or other response action due
      to the disposal, depositing, discharge, leaking or other release of any
      hazardous materials; or (c) asserts or alleges that the Company is
      required to pay all or a portion of the cost of any past, present or
      future cleanup, removal or remedial or other response action which arises
      out of or is related to the disposal, depositing, discharge, leaking or
      other release of any hazardous
materials;

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                without
      limiting the generality of the foregoing, to the knowledge of Seller and
      the Company, each of the Company and its Affiliates has obtained and been
      in compliance in all material respects with all of the terms and
      conditions of all permits, licenses, and other authorizations which are
      required under, and has complied in all material respects with all other
      limitations, restrictions, conditions, standards, prohibitions,
      requirements, obligations, schedules and timetables which are contained
      in, Environmental Laws;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                there
      are no conditions existing currently which would subject the Company to
      damages, penalties, injunctive relief or cleanup costs under any
      Environmental Laws or which require cleanup, removal, remedial action or
      other response pursuant to Environmental Laws by the
    Company;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                the
      Company is not subject to any judgment, order or citation related to or
      arising out of any Environmental Laws and is not, and has not been, named
      or listed as a potentially responsible party by any Governmental Entity in
      a matter related to or arising out of any Environmental
    Laws;

              

      

       

      
        	
                 
      

              	
                (v)

              	
                there
      are no agreements with any person pursuant to which the Company would be
      required to defend, indemnify, hold harmless, or otherwise be responsible
      for any violation by or other liability or expense of such person, or
      alleged violation by or other liability or expense of such person, arising
      out of any Environmental Law; and

              

      

       

      
        
           

        

        
          Page
25

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (vi)

              	
                the
      Company has provided Buyer copies of all environmental audits, assessments
      or other evaluations, if any, of the Company or any of its assets,
      properties or business operations.

              

      

       

      
        	
                (EE)

              	
                Related Party
      Transactions.  At Closing there will be no existing
      business arrangements,  between the Company and Seller, the
      officers or managers of the Company, or any of their respective
      Affiliates.  Schedule 7.1(EE)
      contains a description of all transactions between the Company and any
      such persons since January 1, 2006.   Other than the
      Material Agreements, there are no material continuing obligations owing
      from the Company to any third Person created by any of Seller, officers or
      managers of the Company nor any of their Affiliates.  None of
      Seller, officers or managers of the Company, nor any of their respective
      Affiliates, owns any material asset, tangible or intangible, which will be
      used in the operation of the business of the
  Company.

              

      

       

      
        	
                (FF)

              	
                Payout
      Balances.  The Payout Balance for any Well is properly
      reflected on Schedule 7.1(FF)
      as of the respective dates shown thereon.  “Payout Balance(s)”
      means the status, as of the dates of the Company's calculations, of the
      recovery by the Company or a third party of a cost amount specified in the
      contract relating to a Well out of the revenue from such Well where the
      net revenue interest of the Company therein will be increased or reduced
      when such amount has been
recovered.

              

      

       

      
        	
                (GG)

              	
                Hedging
      Transactions.  There are no outstanding hedging
      transactions affecting the Company or the Oil and Gas
      Properties.

              

      

       

      
        	
                (HH)

              	
                Books and
      Records.  All books, records and files of the Company
      (including the Records and those pertaining to the production, gathering,
      transportation and sale of Oil and Gas, and corporate, accounting,
      financial and employee records) (a) have been prepared, assembled and
      maintained on a consistent basis in accordance with usual and customary
      policies and procedures, and (b) fairly and accurately reflect in all
      material respects the ownership, use, enjoyment and operation by the
      Company of its assets.

              

      

       

      
        	
                (II)

              	
                Non-Competition
      Commitments.  There are no agreements or arrangements
      that will be binding on the Company after Closing that limit the ability
      of the Company to compete in any line of business or with any person in
      any geographical area, except customary area of mutual interest provisions
      that cover properties in the immediate vicinity of the lands subject to
      such agreements, which are described on Schedule 7.1(II).

              

      

       

      
        	
                (JJ)

              	
                Previously Owned
      Properties.  To the knowledge of Seller and the Company,
      the Company does not have any obligations or liabilities, contingent or
      otherwise, with respect to any properties previously owned or leased by
      Company, but not currently owned or leased, except for such matters that
      would not reasonably be expected to have a material adverse effect on the
      Company or the Oil and Gas
Properties.

              

      

       

      7.2           Scope of Representations of
Seller.

       

      
        
           

        

        
          Page
26

          
            

          

        

        
           

        

      

       

      
        	
                (A)

              	
                Information About the
      Oil and Gas Properties.  Except as expressly set forth in
      this Agreement, Seller disclaims all liability and responsibility for any
      representation, warranty, statements or communications (orally or in
      writing) to Buyer regarding the Oil and Gas Properties, including any
      information contained in any opinion, information or advice that may have
      been provided to Buyer by any employee, officer, director, agent,
      consultant, engineer or engineering firm, representative, partner, member,
      beneficiary, owner or contractor of Seller wherever and however made,
      including those made in any data room or internet site and any supplements
      or amendments thereto or during any negotiations with respect to this
      Agreement or any confidentiality agreement previously executed by the
      Parties with respect to the Asset.  EXCEPT AS SET FORTH IN
      ARTICLE 7 OF THIS AGREEMENT, SELLER MAKES NO WARRANTY OR REPRESENTATION,
      EXPRESS, STATUTORY OR IMPLIED, AS TO (i) THE ACCURACY, COMPLETENESS
      OR MATERIALITY OF ANY DATA, INFORMATION OR RECORDS FURNISHED TO BUYER IN
      CONNECTION WITH THE OIL AND GAS PROPERTIES; (ii) THE PRESENCE, QUALITY AND
      QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE OIL AND GAS
      PROPERTIES, INCLUDING WITHOUT LIMITATION SEISMIC DATA AND SELLER’S
      INTERPRETATION AND OTHER ANALYSIS THEREOF; (iii) THE ABILITY OF THE
      OIL AND GAS PROPERTIES TO PRODUCE HYDROCARBONS, INCLUDING WITHOUT
      LIMITATION PRODUCTION RATES, DECLINE RATES AND RECOMPLETION OPPORTUNITIES;
      (iv) IMBALANCE OR PAYOUT ACCOUNT INFORMATION, ALLOWABLES, OR OTHER
      REGULATORY MATTERS; (v) THE PRESENT OR FUTURE VALUE OF THE
      ANTICIPATED INCOME, COSTS OR PROFITS, IF ANY, TO BE DERIVED FROM THE OIL
      AND GAS PROPERTIES; (vi) THE ENVIRONMENTAL CONDITION OF THE OIL AND
      GAS PROPERTIES; (vii) ANY PROJECTIONS AS TO EVENTS THAT COULD OR
      COULD NOT OCCUR; (viii) THE TAX ATTRIBUTES OF ANY OIL AND GAS
      PROPERTY; (ix) ANY OTHER MATTERS CONTAINED IN OR OMITTED FROM ANY
      INFORMATION OR MATERIAL FURNISHED TO BUYER BY SELLER OR OTHERWISE
      CONSTITUTING A PORTION OF THE OIL AND GAS PROPERTIES; AND, (x) THE
      COMPLETENESS OR ACCURACY OF THE INFORMATION CONTAINED IN ANY EXHIBIT
      HERETO REGARDING THE OIL AND GAS PROPERTIES.  ANY DATA,
      INFORMATION OR OTHER RECORDS FURNISHED BY SELLER REGARDING THE OIL AND GAS
      PROPERTIES ARE PROVIDED TO BUYER AS A CONVENIENCE AND BUYER’S RELIANCE ON
      OR USE OF THE SAME IS AT BUYER’S SOLE
RISK.

              

      

       

      
        	
                (B)

              	
                Independent
      Investigation.  Buyer agrees that it has, or by Closing
      will have, made its own independent investigation, analysis and evaluation
      of the Oil and Gas Properties and the transaction contemplated by this
      Agreement (including Buyer’s own estimate and appraisal of the extent and
      value of the Company’s Oil and Gas reserves attributable to the Oil and
      Gas Properties and an independent assessment and appraisal of the
      environmental risks and liabilities associated with the acquisition of the
      Oil and Gas Properties).  Buyer agrees that it has had, or will
      have prior to Closing, access to all information necessary to perform its
      investigation and has not relied and will not rely on any representations
      by Seller other than those expressly set forth in this
      Agreement.

              

      

       

      
        
           

        

        
          Page
27

          
            

          

        

        
           

        

      

       

      8.           REPRESENTATIONS AND
WARRANTIES OF BUYER.

       

      8.1           Buyer’s Representations and
Warranties.  Buyer
represents and warrants to Seller as follows as of the date hereof and the
Closing:

       

      
        	
                (A)

              	
                Status.  Buyer
      is a limited partnership duly organized, validly existing and in good
      standing under the laws of the State of
  Delaware.

              

      

       

      
        	
                (B)

              	
                Authority.  Buyer
      has the power and authority to enter into this Agreement, to carry out the
      transactions contemplated hereby and to undertake all of the obligations
      of Buyer set out in this Agreement.

              

      

       

      
        	
                (C)

              	
                Validity of
      Obligations.  The consummation of the transactions
      contemplated by this Agreement will not in any respect violate, nor be in
      conflict with, any provision of Buyer’s partnership agreement or other
      governing documents, or any agreement or instrument to which Buyer is a
      party or is bound, or any judgment, decree, order, statute, rule or
      regulation applicable to Buyer (subject to governmental consents and
      approvals customarily obtained after the Closing).  This
      Agreement and the documents executed and delivered by Buyer in connection
      with the Closing shall constitute legal, valid and binding obligations of
      Buyer, enforceable in accordance with their terms, subject, however, to
      the effects of bankruptcy, insolvency, reorganization, moratorium and
      other laws for the protection of creditors, as well as to general
      principles of equity, regardless of whether such enforceability is
      considered in a proceeding in equity or at
law.

              

      

       

      
        	
                (D)

              	
                Qualification and
      Bonding.  Buyer or its Affiliate which will operate the
      Oil and Gas Properties is, or will be on the Closing Date, in compliance
      with the bonding and liability insurance requirements of all applicable
      state or federal laws or regulations that could affect its ability or
      authority to operate the Oil and Gas
Properties.

              

      

       

      
        	
                (E)

              	
                Non-Security
      Acquisition.  Buyer intends to acquire the Membership
      Interests for its own benefit and account and is not acquiring the
      Membership Interests with the intent of distributing such interests such
      as would be subject to regulation by federal or state securities laws, and
      if, in the future, it should sell, transfer or otherwise dispose of the
      Membership Interests, it will do so in compliance with any applicable
      federal and state securities laws.

              

      

       

      
        	
                (F)

              	
                Evaluation.  By
      reason of Buyer’s knowledge and experience in the evaluation, acquisition
      and operation of oil and gas properties, Buyer has evaluated the merits
      and risks of purchasing the Membership Interests from Seller and has
      formed an opinion based solely upon Buyer’s knowledge and experience and
      not upon any representations or warranties by Seller except those set
      forth herein.

              

      

       

      
        	
                (G)

              	
                Financing.  Buyer
      has sufficient cash, available lines of credit or other sources of
      immediately available funds to enable it to pay the Purchase Price to
      Seller at the Closing.

              

      

       

      
        	
                (H)

              	
                Broker’s
      Fees.  Buyer has incurred no obligation or liability,
      contingent or otherwise, for brokers’ or finders’ fees in respect of the
      matters provided for in this Agreement for which Seller shall have any
      responsibility.

              

      

       

      
        
           

        

        
          Page
28

          
            

          

        

        
           

        

      

       

      9.           CERTAIN AGREEMENTS OF
SELLER.  Seller
and the Company agree and covenant that, unless Buyer shall have otherwise
agreed in writing, the following provisions shall apply:

       

      9.1           Maintenance of Oil and Gas
Properties.  From
the Effective Time until Closing, Seller and the Company agree that they and
their Affiliates shall:

       

      
        	
                (A)

              	
                Administer
      and operate the operated Oil and Gas Properties in a good and workmanlike
      manner and in accordance with the applicable operating
      agreements.

              

      

       

      
        	
                (B)

              	
                Not
      introduce any new methods of management, operation or accounting with
      respect to any or all of the Oil and Gas
  Properties.

              

      

       

      
        	
                (C)

              	
                Use
      commercially reasonable efforts to maintain and keep the Oil and Gas
      Properties in full force and effect; and fulfill all contractual or other
      covenants, obligations and conditions imposed upon the Company with
      respect to the Oil and Gas Properties, including, but not limited to,
      payment of royalties, delay rentals, shut-in gas royalties and any and all
      other required payments.

              

      

       

      
        	
                (D)

              	
                Except
      to the extent necessary or advisable to avoid forfeiture or penalties, not
      enter into agreements to drill new wells or to rework, plug back, deepen,
      plug or abandon any Well, nor commence any drilling, reworking or
      completing or other operations on the Leases which requires estimated
      expenditures exceeding Ten Thousand Dollars ($10,000.00), net to the
      working interest of the Company, for each operation (except for emergency
      operations and operations required under presently existing contractual
      obligations) without obtaining the prior written consent of Buyer (which
      consent shall not be unreasonably withheld, delayed or
      conditioned).

              

      

       

      
        	
                (E)

              	
                Not
      voluntarily relinquish the Company’s or its Affiliate’s position as
      operator to anyone other than Buyer with respect to any of the operated
      Oil and Gas Properties or voluntarily abandon any of the Wells other than
      as required pursuant to the terms of a Lease or by
    regulation.

              

      

       

      
        	
                (F)

              	
                To
      the extent known to Seller or the Company, provide Buyer with prompt
      written notice of (i) any claims, demands, suits or actions made
      against Seller which materially affect the Oil and Gas Properties; or
      (ii) any proposal from a third party to engage in any material
      transaction (e.g., a farmout) with respect to the Oil and Gas
      Properties.

              

      

       

      9.2           Conduct of Business of the
Company.

       

      
        	
                (A)

              	
                Ordinary
      Course.  During the period from the date of this
      Agreement to the Closing Date (except as otherwise specifically
      contemplated by the terms of this Agreement), the Company shall, and
      Seller shall use best efforts to cause the Company to, carry on its
      businesses in the usual, regular and ordinary course in substantially the
      same manner as conducted at the date hereof, and, to the extent consistent
      therewith, use all reasonable efforts to preserve intact its current
      business organization, keep available the services of its current officers
      and employees and preserve its relationships with customers, vendors,
      suppliers, licensors, licensees, distributors and others having business
      dealings with the Company, in each case consistent with past practice, to
      the end that their goodwill and ongoing businesses shall be unimpaired to
      the fullest extent possible at the Closing Date. Without limiting the
      generality of the foregoing or the requirements or restrictions set forth
      in Section 9.1,
      prior to the Closing Date the Company will not, and Seller will not,
      without the prior written consent of Buyer, permit or allow the Company
      to:

              

      

       

      
        
           

        

        
          Page
29

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (i)

              	
                purchase,
      redeem or otherwise acquire or divest any membership interests or other
      securities of the Company or any rights, warrants or options to acquire
      any such interests or other
securities;

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                issue,
      deliver, sell, pledge, dispose of or otherwise encumber any of its equity
      securities or any securities convertible into, or any rights, warrants or
      options to acquire, any such equity
securities;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                amend
      the Company’s organizational
documents;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                acquire
      or agree to acquire (a) by merging or consolidating with, or by purchasing
      a substantial portion of the stock, or other ownership interests in, or
      assets of, or by any other manner, any business or any corporation,
      partnership, association, joint venture, limited liability company or
      other entity or division thereof, or (b) any assets that would be
      material, individually or in the aggregate, to the
  Company;

              

      

       

      
        	
                 
      

              	
                (v)

              	
                except
      for Permitted Encumbrances, sell, lease, mortgage, pledge, grant a lien on
      or otherwise encumber or dispose of any of its properties or assets,
      except (a) the sale of Oil and Gas in the ordinary course of business
      consistent with past practice, or (b) other transactions involving not in
      excess of  $50,000.00 in the
  aggregate;

              

      

       

      
        	
                 
      

              	
                (vi)

              	
                (a)
      incur any new indebtedness for borrowed money or guarantee any such
      indebtedness of another person, issue or sell any debt securities or
      warrants or other rights to acquire any debt securities of the Company,
      guarantee any debt securities of another person, enter into any "keep
      well" or other agreement to maintain any financial statement condition of
      another person or enter into any arrangement having the economic effect of
      any of the foregoing, or (b) make any loans, advances or capital
      contributions to, or investments in, any other
  person;

              

      

       

      
        	
                 
      

              	
                (vii)

              	
                make
      or incur capital expenditures in the aggregate in excess of
      $50,000;

              

      

       

      
        	
                 
      

              	
                (viii)

              	
                make
      any material election relating to taxes or settle or compromise any
      material tax liability;

              

      

       

      
        	
                 
      

              	
                (ix)

              	
                pay,
      discharge or satisfy any claims, liabilities or obligations (absolute,
      accrued, asserted or unasserted, contingent or otherwise), other than the
      payment, discharge or satisfaction, in the ordinary course of business
      consistent with past practice and in accordance with their terms, of
      liabilities reflected or reserved against in the most recent Financial
      Statement (as of June 30,
2008);

              

      

       

      
        	
                 
      

              	
                (x)

              	
                waive
      the benefits of, or agree to modify in any manner, any confidentiality,
      standstill or similar agreement to which the Company is a
      party;

              

      

       

      
        
           

        

        
          Page
30

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (xi)

              	
                adopt
      a plan of complete or partial liquidation or resolutions providing for or
      authorizing such a liquidation or a dissolution, merger, consolidation,
      restructuring, recapitalization or
  reorganization;

              

      

       

      
        	
                 
      

              	
                (xii)

              	
                enter
      into or amend any material contract, agreement or lease, including any
      collective bargaining agreement;

              

      

       

      
        	
                 
      

              	
                (xiii)

              	
                change
      any accounting principle used by it, except for changes conforming to the
      Internal Revenue Code and to regulations and other pronouncements
      promulgated by the United States
Treasury;

              

      

       

      
        	
                 
      

              	
                (xiv)

              	
                settle
      or compromise any litigation (whether or not commenced prior to the date
      of this Agreement) other than settlements or compromises: (a) of
      litigation where the amount paid in settlement or compromise does not
      exceed $50,000.00, or (b) in consultation and cooperation with Buyer,
      and, with respect to any such settlement, with the prior written consent
      of Buyer;

              

      

       

      
        	
                 
      

              	
                (xv)

              	
                approve
      any authority for expenditure (AFE) or otherwise make any commitment which
      might require the Company to make any capital expenditure or incur any
      expense other than ordinary operating expenses within industry standards;
      or

              

      

       

      
        	
                 
      

              	
                (xvi)

              	
                authorize
      any of, or commit or agree to take any of, the foregoing
      actions.

              

      

       

      9.3           Records and Audit
Rights.  Seller
shall have the right to make and retain copies of the Records as Seller may
desire prior to the delivery of the Records to Buyer.  Buyer, for a
period of seven (7) years after the Closing Date, shall make available to Seller
(at the location of such Records in Buyer’s organization) access to such Records
as Buyer may have in its possession (or to which it may have access) upon
written request of Seller, during normal business hours; provided, however, that
Buyer shall not be liable to Seller for the loss of any Records by reason of
clerical error or inadvertent loss or destruction of Records.

       

      Seller
agrees to make available to Buyer prior to and for a period of twelve (12)
months following Closing any and all existing information and documents in the
possession of Seller that Buyer may reasonably require to comply with Buyer’s
tax and financial reporting requirements and audits.  Without limiting
the generality of the foregoing, Seller will use its commercially reasonable
efforts after execution of this Agreement and for twelve (12) months following
Closing to cooperate with the independent auditors chosen by Buyer (“Buyer’s
Auditor”) in connection with their audit of any financial statements of the
Company that Buyer or any of its Affiliates requires to comply with their tax
and financial reporting requirements, and their review of any interim quarterly
financial statements of the Company that Buyer requires to comply with such
reporting requirements.  Seller’s cooperation will include (i) such
reasonable access to Seller’s employees who were responsible for preparing the
financialstatements and work papers and other supporting documents used in the
preparation of such financial statements as may be required by Buyer’s Auditor
to perform an audit in accordance with generally accepted auditing standards,
and (ii) delivery of one or more customary representation letters (in
substantially the form previously approved by Seller and Buyer) from Seller to
Buyer’s Auditor that are requested by Buyer to allow such auditors to complete
an audit (or review of any interim quarterly financials), and to issue an
opinion that in Buyer’s experience is acceptable with respect to an audit or
review of those financialstatements required pursuant to this
Section.  Buyer will reimburse Seller, within three (3) business days
after demand therefor, for any reasonable out-of-pocket and overhead costs with
respect to any costs incurred by Seller in complying with the provisions of this
Section.

       

      
        
           

        

        
          Page
31

          
            

          

        

        
           

        

      

       

      9.4           Reasonable Efforts;
Notification.

       

      
        	
                (A)

              	
                Reasonable
      Efforts. Upon the terms and subject to the conditions set forth in
      this Agreement, except to the extent otherwise provided in this Section 9.4,
      each of the parties agrees to use commercially reasonable efforts to take,
      or cause to be taken, all actions, and to do, or cause to be done, and to
      assist and cooperate with the other parties in doing, all things
      necessary, proper or advisable to consummate and make effective, in the
      most expeditious manner practicable, the transactions contemplated by this
      Agreement, including (i) the obtaining of all necessary actions or
      nonactions, waivers, consents and approvals from governmental authorities
      and the making of all necessary registrations and filings (including
      filings with governmental authorities, if any) and the taking of all
      reasonable steps as may be necessary to obtain an approval or waiver from,
      or to avoid an action or proceeding by, any governmental authorities, (ii)
      the obtaining of all necessary consents, approvals or waivers from third
      parties, (iii) the defending of any lawsuits or other legal proceedings,
      whether judicial or administrative, challenging this Agreement or the
      consummation of the transactions contemplated hereby, including seeking to
      have any stay or temporary restraining order entered by any court or other
      governmental authorities vacated or reversed, and (iv) the execution and
      delivery of any additional instruments necessary to consummate the
      transactions contemplated by this Agreement; provided, however, that
      neither the Company nor Buyer shall be under any obligation to take any
      action to the extent that the governing body of such party shall conclude
      in good faith, after consultation with and based upon the written advice
      of their respective outside legal counsel (which advice in each case need
      not constitute an opinion), that such action would cause a breach of
      fiduciary obligations under applicable
law.

              

      

       

      
        	
                (B)

              	
                Notification.  The
      Seller and the Company shall give prompt notice to Buyer, and Buyer shall
      give prompt notice to the Seller and the Company, of (i) any
      representation or warranty made by it contained in this Agreement becoming
      untrue or inaccurate in any material respect or (ii) the failure by it to
      comply with or satisfy in any material respect any covenant, condition or
      agreement to be complied with or satisfied by it under this Agreement;
      provided,
      however, that no such notification shall affect the representations
      or warranties or covenants or agreements of the parties or the conditions
      to the obligations of the parties
hereunder.

              

      

       

      9.5           Payment of
Indebtedness.  Seller
will cause all indebtedness owed to the Company by Seller or any Affiliate of
Seller, if any, to be paid in full prior to Closing.

       

      9.6           Insider Debt and
Liabilities.  All
debt, obligations and liabilities, if any, owed by the Company to Seller and its
Affiliates shall be deemed paid and cancelled at Closing.  Seller
agrees to and agrees to cause its Affiliates to waive and release the Company,
from any and all such debts, liabilities and 

       

      
        
           

        

        
          Page
32

          
            

          

        

        
           

        

      

       

      obligations,
by executing and delivering a release at Closing in a form acceptable to Buyer
(collectively, the "Releases").  Seller shall deliver any documents
evidencing such debt, if any, marked paid, to Buyer at Closing.

       

      9.7           Operation of Oil and Gas
Properties.  Seller
shall cause the transfer all operations of the Oil and Gas Properties to Buyer
or Buyer’s designee effective as of Closing.

       

      10.           CERTAIN AGREEMENTS OF
BUYER.  Buyer
agrees and covenants that unless Seller shall have consented otherwise in
writing, the following provisions shall apply:

       

      10.1           Plugging
Obligation.  Upon
consummation of the Closing, the Company and Buyer shall perform all necessary
and proper plugging and abandonment of all Wells and all surface restoration and
reclamation required by law or the Leases, in each case to the extent the same
relate to the Oil and Gas Properties.

       

      10.2           Plugging
Bond.  The
Company, Buyer or Buyer’s Affiliate shall post, prior to Closing, the necessary
bonds or letters of credit as required by the state in which the Leases are
located for the plugging of all Wells, and provide Seller with a copy of same,
and provide proof satisfactory to Seller that the applicable state has accepted
such bonds or letters of credit as sufficient assurance to cover the plugging of
all Wells and related matters.  Further, Buyer shall provide to Seller
copies of the approval by any applicable regulatory agencies concerning change
of operatorship of the Oil and Gas Properties if Buyer or Buyer’s Affiliate is
duly elected Operator.

       

      10.3           Seller’s
Logos.  Commencing
no later than sixty (60) days after Closing, Buyer shall promptly cover or cause
to be covered by decals or new signage any names and marks on the Oil and Gas
Properties used by Seller, and all variations and derivatives thereof and logos
relating thereto, and shall not thereafter make any use whatsoever of such
names, marks and logos.

       

      10.4           Like-Kind
Exchanges.  Each
Party consents to the other Party’s assignment of its rights and obligations
under this Agreement to its Qualified Intermediary (as that term is defined in
Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations), or to its Qualified
Exchange Accommodation Titleholder (as that term is defined in Rev. Proc.
2000-37), in connection with effectuation of a like-kind
exchange.  However, Seller and Buyer acknowledge and agree that any
assignment of this Agreement to a Qualified Intermediary or to a Qualified
Exchange Accommodation Titleholder does not release either Party from any of
their respective liabilities and obligations to each other under the
Agreement.  Each Party agrees to cooperate with the other to attempt
to structure the transaction as a like-kind exchange.  The electing
Party shall indemnify and hold harmless the non-electing Party from and against
all claims, expenses (including reasonable attorney’s fees and court costs) and
liabilities resulting from any such like-kind exchange.

       

      
        
           

        

        
          Page
33

          
            

          

        

        
           

        

      

       

      11.           CONDITIONS PRECEDENT TO
OBLIGATIONS OF BUYER.  All
obligations of Buyer under this Agreement are, at Buyer’s election, subject to
the fulfillment, prior to or at the Closing, of each of the following
conditions:

       

      11.1           No
Litigation.  At
the Closing, no suit, action or other proceeding shall be pending before any
court or governmental agency which attempts to prevent the occurrence of the
transactions contemplated by this Agreement.

       

      11.2           Representations and
Warranties.  All
representations and warranties of Seller and the Company contained in this
Agreement shall be true in all material respects as of the Closing as if such
representations and warranties were made as of the Closing Date (except for
those representations or warranties that are expressly made only as of another
specific date, which representations and warranties shall be true in all
material respects as of such other date) and Seller and the Company shall have
performed and satisfied in all material respects all covenants and fulfilled all
conditions required by this Agreement to be performed and satisfied by Seller
and the Company at or prior to the Closing.

       

      11.3           Operations.  Operations
of the Oil and Gas Properties shall have been transferred to Buyer or Buyer’s
designee.

       

      11.4           Due
Diligence.  Buyer’s
due diligence review of the Company and its properties, books and records and
operations shall not have identified any issue, contingency or other matter
which could have a material adverse effect on the Company or its
assets.

       

      11.5           Releases.  Seller
and any of its Affiliates involved in transactions with the Company shall have
executed and delivered the Releases to Buyer so long as said Releases comply
with the terms of this Agreement.

       

      11.6           Release of Indebtedness and
Liens.  All
indebtedness of the Company shall have been paid in full and discharged and all
of its assets shall have been released from all liens, security interests and
other encumbrances.

       

      12.           CONDITIONS PRECEDENT TO THE
OBLIGATIONS OF SELLER.  All
obligations of Seller under this Agreement are, at Seller’s election, subject to
the fulfillment, prior to or at the Closing, of each of the following
conditions:

       

      12.1           No
Litigation.  At
the Closing, no suit, action or other proceeding shall be pending before any
court or governmental agency which attempts to prevent the occurrence of the
transactions contemplated by this Agreement.

       

      12.2           Representations and
Warranties.  All
representations and warranties of Buyer contained in this Agreement shall be
true in all material respects as of the Closing, as if such representations and
warranties were made as of the Closing Date (except for those representations or
warranties that are expressly made only as of another specific date, which
representations and warranties shall be true in all material respects as of such
other date) and Buyer shall have performed and satisfied in all material
respects all covenants and fulfilled all conditions required by this Agreement
to be performed and satisfied by Buyer at or prior to the Closing.

       

      
        
           

        

        
          Page
34

          
            

          

        

        
           

        

      

       

      13.           TERMINATION.

       

      13.1           Causes of
Termination.  This
Agreement and the transactions contemplated herein may be
terminated:

       

      
        	
                (A)

              	
                At
      any time by mutual consent of the
Parties.

              

      

       

      
        	
                (B)

              	
                By
      either Party as provided in Sections 5.4(C) and 6.4(D) pertaining to Title
      Defects  and Adverse Environmental Conditions, respectively, and
      by Buyer as provided in Section 5.5(B) pertaining to preferential
      purchase rights.

              

      

       

      
        	
                (C)

              	
                By
      Buyer if, on the Closing Date, any of the conditions set forth in Article
      11 hereof shall not have been satisfied or
  waived.

              

      

       

      
        	
                (D)

              	
                By
      Seller if, on the Closing Date, any of the conditions set forth in Article
      12 hereof shall not have been satisfied or
  waived.

              

      

       

      
        	
                (E)

              	
                By
      Seller or Buyer if Closing has not occurred on or before October 31,
      2008.

              

      

       

      
        	
                (F)

              	
                Notwithstanding
      anything contained herein, a Party shall not have the right to terminate
      this Agreement pursuant to clause (C), (D) or (E) above if such Party is
      at such time in material breach of any provision of this
      Agreement.

              

      

       

      13.2           Effect of
Termination.

       

      
        	
                (A)

              	
                Buyer’s
      Breach.  If Closing does not occur because Buyer
      wrongfully fails to tender performance at Closing or otherwise breaches
      this Agreement prior to Closing, and Seller is ready to close and is not
      in material breach of this Agreement, Seller shall have the right to
      terminate this Agreement and retain the Deposit, together with interest
      thereon, as liquidated damages.  Buyer’s failure to close shall
      not be considered wrongful if (i) conditions to Buyer’s obligation to
      close under Article 11 are not satisfied through no fault of Buyer and are
      not waived, or (ii) Buyer has terminated this Agreement as of right
      under Section 13.1.  The remedy set forth herein shall be
      Seller’s sole and exclusive remedy for Buyer’s wrongful failure to close
      hereunder and Seller expressly waives any and all other remedies, legal
      and equitable, that it otherwise may have for Buyer’s failure to
      close.

              

      

       

      
        	
                (B)

              	
                Seller’s
      Breach.  If Closing does not occur because Seller
      wrongfully fails to tender performance at Closing or otherwise breaches
      this Agreement prior to Closing, and Buyer is ready to close and is not in
      material breach of this Agreement, Buyer may terminate this Agreement, in
      which event Seller will return the Deposit, together with interest
      thereon, to Buyer immediately after the determination that the Closing
      will not occur.  If Buyer elects not to terminate this Agreement
      upon any such breach by Seller, Buyer shall retain all legal remedies for
      Seller’s breach of this Agreement, including, without limitation, specific
      performance of this Agreement.  Seller’s failure to close shall
      not be considered wrongful if (i) conditions to Seller’s conditions
      to close under Article 12 are not satisfied through no fault of Seller and
      are not waived; or (ii) Seller has terminated this Agreement as of
      right under Section 13.1.

              

      

       

      
        
           

        

        
          Page
35

          
            

          

        

        
           

        

      

       

      
        	
                (C)

              	
                Termination Pursuant
      to Section 13.1.  If Buyer or Seller terminates this
      Agreement pursuant to Section 13.1 in the absence of a breach by the other
      Party, Seller shall return the Deposit and all accrued interest thereon to
      Buyer and neither Buyer nor Seller shall have any liability to the other
      Party for termination of this Agreement.  If Buyer or Seller
      terminates this Agreement pursuant to Section 13.1 and asserts that a
      breach of this Agreement has occurred, the notice of termination shall
      include a statement describing the nature of the alleged breach together
      with supporting documentation.

              

      

       

      
        	
                (D)

              	
                Effect of
      Termination.  In the event of the termination of this
      Agreement pursuant to the provisions of this Article 13 or elsewhere in
      this Agreement, this Agreement shall become void and have no further force
      and effect and, except as provided in this Article 13, for the
      indemnities provided for in Sections 6.2(B) and 14.3, any breach of this
      Agreement prior to such termination and any continuing confidentiality
      requirement, neither Party shall have any further right, duty or liability
      to the other hereunder.  Upon termination, Buyer agrees to
      return to Seller or destroy all materials, documents and copies thereof
      provided, obtained or discovered in the course of any due diligence
      investigations of the Assets.

              

      

       

      14.           INDEMNIFICATION.

       

      14.1           Indemnification by
Seller.  UPON
CLOSING, SELLER SHALL TO THE FULLEST EXTENT PERMITTED BY LAW, RELEASE, DEFEND,
INDEMNIFY, AND HOLD HARMLESS BUYER, THE COMPANY, THEIR AFFILIATES, AND EACH OF
THEIR RESPECTIVE OWNERS, PARTNERS, MEMBERS, MANAGERS, DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, OTHER REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY
THE “BUYER GROUP”) FROM AND AGAINST THE FOLLOWING:

       

      
        	
                (A)

              	
                MISREPRESENTATIONS.  ALL
      CLAIMS, DEMANDS, LIABILITIES, JUDGMENTS, LOSSES AND REASONABLE COSTS,
      EXPENSES AND ATTORNEYS’ FEES (INDIVIDUALLY A “LOSS” AND COLLECTIVELY, THE
      “LOSSES”) ARISING FROM THE BREACH BY SELLER OR THE COMPANY OF ANY
      REPRESENTATION OR WARRANTY SET FORTH IN THIS
  AGREEMENT;

              

      

       

      
        	
                (B)

              	
                BREACH OF
      COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY SELLER
      OR THE COMPANY OF ANY COVENANT SET FORTH IN THIS AGREEMENT;
      AND

              

      

       

      
        	
                (C)

              	
                OWNERSHIP AND
      OPERATION.  ALL LOSSES ARISING FROM THE COMPANY’S
      BUSINESS OR THE OWNERSHIP OR OPERATION OF THE COMPANY AND THE OIL AND GAS
      PROPERTIES PRIOR TO THE EFFECTIVE TIME DIRECTLY ASSOCIATED WITH THE
      FOLLOWING MATTERS:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                DAMAGES
      TO PERSONS OR PROPERTY, OR DEATH, FOR CLAIMS ASSERTED BY ANY THIRD PARTY
      AND ACCRUING PRIOR TO THE EFFECTIVE
TIME;

              

      

       

      
        
           

        

        
          Page
36

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (ii)

              	
                THE
      VIOLATION BY THE COMPANY OR ITS AFFILIATES OF THE TERMS OF ANY AGREEMENT
      BINDING UPON THE COMPANY OR ITS
AFFILIATES;

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                CLAIMS
      AGAINST THE COMPANY OR ITS AFFILIATES BY CO-OWNERS, PARTNERS, JOINT
      VENTURERS AND OTHER PARTICIPANTS IN THE
WELLS;

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                THE
      IMPROPER PAYMENT OF ROYALTIES, RENTALS AND SIMILAR PAYMENTS BY THE COMPANY
      OR ITS AFFILIATES UNDER THE LEASES PRIOR TO THE EFFECTIVE
      TIME;

              

      

       

      
        	
                 
      

              	
                (v)

              	
                THE
      LITIGATION MATTERS SET FORTH ON SCHEDULE
      7.1(G);

              

      

       

      
        	
                 
      

              	
                (vi)

              	
                AD
      VALOREM, PROPERTY, SEVERANCE, FRANCHISE, INCOME, PAYROLL AND OTHER TAXES
      ATTRIBUTABLE TO THE PERIOD OF TIME PRIOR TO THE EFFECTIVE
      TIME;

              

      

       

      
        	
                 
      

              	
                (vii)

              	
                ANY
      CONTAMINATION OR CONDITION THAT IS THE RESULT OF ANY OFF-SITE DISPOSAL BY
      THE COMPANY OR ITS AFFILIATES OF ANY POLLUTANTS, CONTAMINANTS OR HAZARDOUS
      MATERIAL ON, IN OR BELOW ANY PROPERTIES NOT INCLUDED IN THE ASSETS PRIOR
      TO THE EFFECTIVE TIME;

              

      

       

      
        	
                 
      

              	
                (viii)

              	
                COSTS
      AND EXPENSES RELATING TO THE OWNERSHIP OR OPERATION OF THE OIL AND GAS
      PROPERTIES THAT ARE UNPAID AS OF THE CLOSING DATE AND THAT ARE
      ATTRIBUTABLE TO THE PERIOD OF TIME PRIOR TO THE EFFECTIVE
      TIME;

              

      

       

      
        	
                 
      

              	
                (ix)

              	
                ALL
      LOSSES RELATING TO ANY OF THE EXCLUDED ASSETS OR EXCLUDED LIABILITIES OR
      THE ASSIGNMENT THEREOF.

              

      

       

      
        	
                (D)

              	
                Notwithstanding
      the above, the following limitations shall apply to Seller’s
      indemnification obligations:

              

      

       

      
        	
                 
      

              	
                (i)

              	
                Seller
      shall not be obligated to indemnify Buyer for any Loss unless Buyer has
      delivered a written notice of such Loss within the Survival Period (as
      defined below) applicable to such Loss.  Any Loss for which
      Seller does not receive written notice before the end of the Survival
      Period shall be deemed to be an Assumed Liability.  The
      “Survival Period” applicable to Losses shall
  mean:

              

      

       

      
        	
                 
      

              	
                (1)

              	
                With
      regard to a breach of representations and warranties contained in
      Sections 7.1(A), (B), (C), (D), (G), (J), (O), (S) (T), (U) and (EE)
      for an indefinite period following the
Closing;

              

      

       

      
        	
                 
      

              	
                (2)

              	
                With
      regard to a breach of all of the other representations and warranties by
      Seller in this Agreement for a period of one (1) year following the
      Closing;

              

      

       

      
        
           

        

        
          Page
37

          
            

          

        

        
           

        

      

       

      
        	
                 
      

              	
                (3)

              	
                With
      regard to a breach of a covenant by Seller, for a period or one (1) year
      following the Closing; and

              

      

       

      
        	
                 
      

              	
                (4)

              	
                With
      regard to the matters covered by Section 14.1 (C), for one year following
      the Closing.

              

      

       

      
        	
                 
      

              	
                (ii)

              	
                Seller
      shall have no liability or obligation for any Losses, unless and until and
      only to the extent that the aggregate Losses for which Buyer is entitled
      to recover under this Agreement exceeds three percent (3%) of the Base
      Purchase Price (the “Indemnity Deductible”) (such amount being a
      deductible and not a threshold).

              

      

       

      
        	
                 
      

              	
                (iii)

              	
                The
      amount of Losses required to be paid by Seller to indemnify Buyer pursuant
      to this Agreement shall be reduced to the extent of any amounts actually
      received by Buyer pursuant to the terms of the insurance policies (if any)
      covering such claim and any tax benefits received by
  Buyer.

              

      

       

      
        	
                 
      

              	
                (iv)

              	
                Except
      as specifically provided in Section 14.1(C), Seller’s indemnification
      obligations shall not cover any liabilities, duties and obligations
      relating to properly plugging and abandoning wells, restoring and
      reclaiming the surface, removal of all pipelines, equipment, and related
      facilities now or hereafter located on the Oil and Gas Properties, and
      cleaning up, restoring and Remediation of the Oil and Gas Properties in
      accordance with the Environmental Laws and the relevant Leases, or any
      other violation or claimed violation of Environmental Laws (including but
      not limited to the payment of fines, penalties, monetary sanctions or
      other civil liabilities) or the presence, disposal, release or threatened
      release of any hazardous substance or hazardous waste from the Oil and Gas
      Properties into the atmosphere or into or upon land or any water course or
      body of water, including groundwater, whether or not attributable to the
      Company’s activities or the activities of third parties.  All
      such matters are covered exclusively by Article 6 of this
      Agreement.

              

      

       

      14.2           Indemnification by
Buyer.  UPON
CLOSING, BUYER SHALL TO THE FULLEST EXTENT PERMITTED BY LAW, RELEASE, DEFEND,
INDEMNIFY, AND HOLD HARMLESS SELLER’S GROUP FROM AND AGAINST THE
FOLLOWING:

       

      
        	
                (A)

              	
                MISREPRESENTATIONS.  ALL
      LOSSES ARISING FROM THE BREACH BY BUYER OF ANY REPRESENTATION OR WARRANTY
      SET FORTH IN THIS AGREEMENT THAT SURVIVES
  CLOSING;

              

      

       

      
        	
                (B)

              	
                BREACH OF
      COVENANTS.  ALL LOSSES ARISING FROM THE BREACH BY BUYER
      OF ANY COVENANT SET FORTH IN THIS
AGREEMENT;

              

      

       

      
        	
                (C)

              	
                POST-CLOSING
      LIABILITIES.  ALL LOSSES ARISING FROM THE OWNERSHIP AND
      OPERATION OF THE OIL AND GAS PROPERTIES AFTER THE CLOSING
      DATE.

              

      

       

      14.3           Physical
Inspection.  BUYER
INDEMNIFIES AND AGREES TO RELEASE, DEFEND, INDEMNIFY AND HOLD HARMLESS THE
SELLER’S GROUP FROM AND AGAINST ANY AND ALL CLAIMS ARISING FROM BUYER’S
INSPECTING AND OBSERVING THE OIL AND GAS PROPERTIES, 

       

      
        
           

        

        
          Page
38

          
            

          

        

        
           

        

      

       

      INCLUDING
(A) CLAIMS FOR PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE BUYER, ITS
CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES, AND DAMAGE TO THE PROPERTY
OF BUYER OR OTHERS ACTING ON BEHALF OF BUYER; AND (B) CLAIMS, DEMANDS,
LOSSES, DAMAGES, LIABILITIES, JUDGMENTS, CAUSES OF ACTION, COSTS OR EXPENSES FOR
PERSONAL INJURIES TO OR DEATH OF EMPLOYEES OF THE SELLER’S GROUP OR THIRD
PARTIES, AND DAMAGE TO THE PROPERTY OF THE SELLER’S GROUP OR THIRD
PARTIES.  THE FOREGOING INDEMNITY INCLUDES, AND THE PARTIES INTEND IT
TO INCLUDE, AN INDEMNIFICATION OF THE SELLER’S GROUP FROM AND AGAINST CLAIMS
ARISING OUT OF OR RESULTING, IN WHOLE OR PART, FROM THE CONDITION OF THE ASSETS
OR THE SELLER’S GROUP’S SOLE, JOINT, COMPARATIVE, OR CONCURRENT NEGLIGENCE,
STRICT LIABILITY OR FAULT BUT NOT THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
SELLER’S GROUP.

       

      14.4           Notification.  As
soon as reasonably practical after obtaining knowledge thereof, the indemnified
Party shall notify the indemnifying Party of any claim or demand which the
indemnified Party has determined has given or could give rise to a claim for
indemnification under this Article 14.  Such notice shall specify the
agreement, representation or warranty with respect to which the claim is made,
the facts giving rise to the claim and the alleged basis for the claim, and the
amount (to the extent then determinable) of liability for which indemnity is
asserted.  In the event any action, suit or proceeding is brought with
respect to which a Party may be liable under this Article 14, the defense of the
action, suit or proceeding (including all settlement negotiations and
arbitration, trial, appeal, or other proceeding) shall be at the discretion of
and conducted by the indemnifying Party.  If an indemnified Party
shall settle any such action, suit or proceeding without the written consent of
the indemnifying Party (which consent shall not be unreasonably withheld), the
right of the indemnified Party to make any claim against the indemnifying Party
on account of such settlement shall be deemed conclusively denied.  An
indemnified Party shall have the right to be represented by its own counsel at
its own expense in any such action, suit or proceeding, and if an indemnified
Party is named as the defendant in any action, suit or proceeding, it shall be
entitled to have its own counsel and defend such action, suit or proceeding with
respect to itself at its own expense.  Subject to the foregoing
provisions of this Article 14, neither Party shall, without the other Party’s
written consent, settle, compromise, confess judgment or permit judgment by
default in any action, suit or proceeding if such action would create or attach
any liability or obligation to the other Party.  The Parties agree to
make available to each other, and to their respective counsel and accountants,
all information and documents reasonably available to them which relate to any
action, suit or proceeding, and the Parties agree to render to each other such
assistance as they may reasonably require of each other in order to ensure the
proper and adequate defense of any such action, suit or proceeding.

       

      15.           TAX
MATTERS.

       

      
        
           

        

        
          Page
39

          
            

          

        

        
           

        

      

       

      
        	
                (A)

              	
                Except
      as otherwise expressly provided in this Agreement, the parties agree that
      (i) Seller will be responsible for and will pay all taxes
      attributable to or arising from the ownership, sale, or other disposition
      of the Membership Interests on or prior to the Effective Time, including
      the transaction contemplated hereby, and all taxes attributable to or
      arising from the operation of the Company and its assets prior to the
      Effective Time, and Buyer may invoice Seller for any such taxes not
      accounted for in the Purchase Price adjustments set forth herein and
      Seller shall pay the amount of such invoice within thirty (30) days
      thereof, (ii) Buyer will be responsible for and will pay all taxes
      attributable to or arising from the ownership of the Membership Interests
      after the Effective Time, and (iii) the Company will be responsible for
      and will pay all taxes attributable to or arising from the operation of
      its business and its assets after the Effective Time, as such taxes become
      due and payable.  Any party which pays any taxes for which the
      other party is responsible will be entitled to prompt reimbursement upon
      presentation of evidence of such payment.  The foregoing shall
      not effect or limit any liability or indemnification related to any breach
      of representation, warranty or covenant of Seller or the Company set forth
      herein.

              

      

       

      
        	
                (B)

              	
                Seller
      shall cause to be prepared (subject to Buyer’s review and approval) any
      and all tax returns which are required to be filed for, by, on behalf of,
      or with respect to, the Company for any period before June 30, 2008,
      including any tax return required for any short tax year ending as of the
      Effective Time.

              

      

       

      
        	
                (C)

              	
                Seller
      (at Seller’s sole risk, cost and expense) shall have the right to control
      the conduct of any audit, examination, investigation or administrative,
      court or other proceeding in connection with any taxing period, tax return
      or other tax matter (a "Tax Contest") related to the Membership Interests
      arising out of or with respect to any period on or before the Effective
      Time.  Buyer shall have the right (at Buyer's sole cost, risk
      and expense) to control the conduct of any Tax Contest related to the
      Membership Interests arising or with respect to any period after the
      Effective Time.  Buyer and the Company shall have the right to
      control the conduct of any Tax Contest related to the Company whether
      arising or with respect to any period prior to or after the Effective
      Time.  If either party hereto or any of their Affiliates
      receives any written or oral communication with respect to any question,
      adjustment, assessment or pending or threatened Tax Contest which pertains
      to any period for which the other party has the right of control under
      this Section 15(e),
      the receiving party shall promptly notify the other parties hereto of such
      communication.

              

      

       

      
        	
                (D)

              	
                In
      connection with the preparation of any tax return or with respect to any
      Tax Contest, each of the parties hereto shall grant or cause to be granted
      to the other parties or such parties' representatives, access at all
      reasonable times during normal business hours and following reasonable
      notice to all information, books and records relating to the Company
      within its possession or control, including the right to make copies
      thereof to the extent reasonably necessary in connection with the rights
      and responsibilities for the tax matters set forth herein, and shall
      furnish such assistance and cooperation as may be reasonably requested in
      connection therewith.

              

      

       

      16.           MISCELLANEOUS.

       

      16.1           Casualty
Loss.

       

      
        
           

        

        
          Page
40

          
            

          

        

        
           

        

      

       

      
        	
                (A)

              	
                An
      event of casualty means volcanic eruptions, acts of God, fire, explosion,
      earthquake, wind storm, flood, drought, condemnation, the exercise of any
      right of eminent domain, confiscation and seizure (a
      “Casualty”).  A Casualty does not include depletion due to
      normal production and depreciation or failure of equipment or
      casing.

              

      

       

      
        	
                (B)

              	
                If,
      prior to the Closing, a Casualty occurs (or Casualties occur) which
      results in a reduction in the value of any of the Oil and Gas Properties
      (“Casualty Loss”), (i) Seller shall retain such Oil and Gas Property
      and such Oil and Gas Property shall be the subject of an adjustment to the
      Base Purchase Price in the same manner set forth in Section 5.4 hereof, or
      (ii) at the Closing, Seller shall assign to Buyer or the Company, at
      Buyer’s election, the right to receive all insurance proceeds or other
      sums payable to Seller or its Affiliates by reason of such Casualty Loss,
      the Base Purchase Price shall not be adjusted by reason of such payment,
      and the affected Oil and Gas Property will continue to be owned by the
      Company.  In the event a Casualty Loss results in a five percent
      (5%) or greater reduction in the value of an affected Oil and Gas
      Property, Buyer shall have the right to exclude such Oil and Gas Property
      from this transaction, receive a reduction of the Base Purchase Price
      based on the Allocated Value of such Oil and Gas Property, and the Company
      shall transfer the affected Oil and Gas Property to Seller or Seller’s
      designee as an Excluded Asset.

              

      

       

      
        	
                (C)

              	
                For
      purposes of determining the diminution in value of an Asset as a result of
      a Casualty Loss, the Parties shall use the same methodology as applied in
      determining the diminution in value of an Asset as a result of a Title
      Defect as set forth in
Section 5.4.

              

      

       

      16.2           Confidentiality.

       

      
        	
                (A)

              	
                Prior
      to Closing, to the extent not already public, Buyer shall not disclose to
      any party that it is conducting negotiations with Seller or has entered
      into this Agreement other than as expressly provided herein or as
      permitted in the confidentiality agreement executed by Buyer in Seller’s
      favor prior to the execution of this Agreement, which shall continue to
      apply until the Closing and thereafter in the event of termination of this
      Agreement prior to the Closing. Buyer shall exercise all due diligence in
      safeguarding and maintaining secure all engineering, geological and
      geophysical data, seismic data, reports and maps, the results and findings
      of Buyer with regard to its due diligence associated with the Assets
      (including without limitation with regard to due diligence associated with
      environmental and title matters) and other data relating to the Assets
      (collectively, the “Confidential Information”).  Buyer
      acknowledges that, prior to Closing, all Confidential Information shall be
      treated as confidential. Notwithstanding the foregoing, Seller understands
      that Buyer has public reporting obligations that may require public
      announcement of certain information relating to this
      Agreement.  Seller and Buyer shall consult with each other with
      regard to all publicity and other releases at or prior to the Closing
      concerning this Agreement and the transaction contemplated hereby and,
      except as provided herein or as required by applicable law or other
      applicable rules or regulations of any governmental body or stock
      exchange, neither party shall issue any publicity or other release without
      the prior written consent of the other party, such consent not to be
      unreasonably withheld.

              

      

       

      
        
           

        

        
          Page
41

          
            

          

        

        
           

        

      

       

      
        	
                (B)

              	
                In
      the event of termination of this Agreement for any reason, Buyer shall not
      use or knowingly permit others to use such Confidential Information in a
      manner detrimental to Seller, and will not disclose any such Confidential
      Information to any person, firm, corporation, association or other entity
      for any reason or purpose whatsoever, except to Seller or to a
      governmental agency pursuant to a valid subpoena or other order or
      pursuant to applicable governmental regulations, rules or
      statutes.

              

      

       

      
        	
                (C)

              	
                The
      undertaking of confidentiality shall not diminish or take precedence over
      any separate confidentiality agreement between the
      Parties.  Should this Agreement terminate, such separate
      confidentiality agreement shall remain in full force and
      effect.

              

      

       

      16.3           Notices.  Any
notice, request, demand, or consent required or permitted to be given hereunder
shall be in writing and delivered in person or by certified letter, with return
receipt requested, or by facsimile addressed to the Party for whom intended at
the following addresses:

       

      SELLER:

       

      Cano
Petroleum, Inc.

      801
Cherry Street, Unit 25, Suite 3200

      Fort
Worth, Texas 76102

      Attn:
Phillip Feiner

      Tel:
(817) 698-0900

      Fax:
(817) 698-0763

      

      

      BUYER:

       

      Legacy Reserves Operating
LP

      303 West Wall, Suite 1400

      Midland, Texas 79701

      Attn:                      Mr.
Steven H. Pruett

      Tel:           (432)
689-5200

      Fax:           (432)
689-5299

      

      or at
such other address as any of the above shall specify by like notice to the
other.

       

      16.4           Press Releases and Public
Announcements.  Buyer
and Seller are permitted to issue a press release and filing on Form 8-K with
the Securities and Exchange Commission related to the present
transaction.  Notwithstanding the foregoing, no press release or any
public announcement shall identify the principals of Buyer or Seller without the
other party’s prior written consent, which consent shall not be unreasonably
withheld.

       

      16.5           Compliance with Express
Negligence Test.  THE
PARTIES AGREE THAT THE INDEMNIFICATION OBLIGATIONS OF THE INDEMNIFYING PARTY
SHALL BE WITHOUT REGARD TO THE NEGLIGENCE (EXCLUDING GROSS NEGLIGENCE) OR STRICT
LIABILITY OF THE INDEMNIFIED PERSON(S), WHETHER THE NEGLIGENCE OR STRICT
LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.

       

      
        
           

        

        
          Page
42

          
            

          

        

        
           

        

      

       

      16.6           Governing
Law.  This
Agreement is governed by and must be construed according to the laws of the
State of Texas, excluding any conflicts-of-law rule or principle that might
apply the law of another jurisdiction.  All disputes related to this
Agreement shall be submitted exclusively to the jurisdiction of the courts of
the State of Texas.

       

      16.7           Exhibits.  The
Exhibits attached to this Agreement are incorporated into and made a part of
this Agreement.

       

      16.8           Fees and
Expenses.  Each
Party shall be solely responsible for all costs and expenses incurred by it in
connection with this transaction (including, but not limited to fees and
expenses of its counsel and accountants) and shall not be entitled to any
reimbursements from the other Party, except as otherwise provided in this
Agreement.

       

      16.9           Assignment.  This
Agreement or any part hereof may not be assigned by either Party without the
prior written consent of the other Party; provided, however, upon notice to the
other Party, either Party shall have the right to assign all or part of its
rights (but none of its obligations) under this Agreement in order to qualify
transfer of the Assets as a “like-kind” exchange for federal tax purposes as
provided in Section 10.4.  Subject to the foregoing, this Agreement is
binding upon the Parties hereto and their respective successors and
assigns.

       

      16.10                      Entire
Agreement.  This
Agreement constitutes the entire agreement reached by the Parties with respect
to the subject matter hereof, superseding all prior negotiations, discussions,
agreements and understandings, whether oral or written, relating to such subject
matter.

       

      16.11                      Severability.  In
the event that any one or more covenants, clauses or provisions of this
Agreement shall be held invalid or illegal, such invalidity or unenforceability
shall not affect any other provisions of this Agreement.

       

      16.12                      Captions.  The
captions in this Agreement are for convenience only and shall not be considered
a part of or affect the construction or interpretation of any provision of this
Agreement.

       

      16.13                      Time of the
Essence.  The
parties recognize and agree that time is of the essence of this
Agreement.

       

      16.14                      Counterpart
Execution.  This
Agreement may be executed in any number of counterparts, and each counterpart
hereof shall be effective as to each Party that executes the same upon execution
of a counterpart by all Parties, whether or not all such Parties execute the
same counterpart.  If counterparts of this Agreement are executed, the
signature pages from various counterparts may be combined into one composite
instrument for all purposes.  All counterparts together shall
constitute only one Agreement but each counterpart shall be considered an
original.

       

      
        
           

        

        
          Page
43

          
            

          

        

        
           

        

      

       

      
        Executed
as of the day and year first above written.

         

        
          
            	 	
                    SELLER:

                     

                    CANO PETROLEUM, INC.

                  	 
	 	 	 	 
	
                     

                  	
                    By:
      

                  	/s/ S.
      Jeffrey Johnson	 
	 	 	S.
      Jeffrey Johnson	 
	 	 	Chief
      Executive Officer	 
	 	 	 	 

          

        

      

    

    
      	 	PANTWIST,
      LLC	 
	 	 	 	 
	
               

            	
              By:
      

            	/s/ Benjamin
      Daitch	 
	 	 	Benjamin
      Daitch	 
	 	 	Vice
      President and Chief Financial Officer 	 
	 	 	 	 

    

     

    
      
        	 	
                BUYER:

                 

                LEGACY RESERVES OPERATING
      LP

                By:  Legacy Reserves Operating GP
      LLC,

                        Its
      General Partner

                 

                By:  Legacy Reserves
      LP

                        Its
      sole member

                 

                By:  Legacy Reserves GP
      LLC,

                        Its
      General Partner

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Steven
      H. Pruett	 
	 	 	Steven
      H. Pruett 	 
	 	 	President
      & Chief Financial Officer	 
	 	 	 	 

      

    

     

     

    
      
         

      

      
        Page
44

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