Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): December 6, 2004

American Real Estate Partners, L.P.

(Exact name of registrant as specified in its charter)
 	 	 	 	 	
Delaware	 	1-9516	 	13-3398766	

 	
(State or other jurisdiction of incorporation)	 	(Commission File Number)	 	(IRS Employer Identification No.)	

 	 	100 South Bedford Road, Mt. Kisco, NY	 	10549	

 	
 	 	(Address of principal executive offices)	 	(Zip Code)	
Registrant’s telephone number, including area code: (914) 242-7700

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communication pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS
 	 	 	 	 	 	 	 	 	
 	Section 1 – Registrant’s Business and Operations	
 	Item 1.01 Entry into a Material Definitive Agreement	
 	Exhibit Index	
SIGNATURES	
PURCHASE AGREEMENT	
ASSIGNMENT AND ASSUMPTION	
MEMBERSHIP PURCHASE AGREEMENT	
ASSIGNMENT AND ASSUMPTION	
AMENDED AND RESTATED OIL & GAS TERM LOAN AGRREMENT	
SECURITY AND PLEDGE AGREEMENT	
TERM LOAN AND SECURITY AGREEMENT	

Table of Contents

Section 1 – Registrant’s Business and Operations

Item 1.01 Entry into a Material Definitive Agreement

On December 6, 2004, AREP Oil & Gas LLC, a Delaware limited liability company (“AREP Oil & Gas”), which is an indirect subsidiary of American Real Estate Partners, L.P. (“AREP”), pursuant to a purchase agreement and related assignment and assumption agreement, each dated as of that date, with Thornwood Associates LP, a Delaware limited partnership (“Thornwood”), purchased $27.5 million aggregate principal amount of term notes issued by TransTexas Gas Corporation (“TransTexas Notes”). The purchase price for the TransTexas Notes was $28,245,890.41, which equals the principal amount of the TransTexas Notes plus accrued but unpaid interest. The notes are payable annually in equal consecutive annual payments of $5,000,000, with the final installment of the unpaid principal payable on August 28, 2008. Interest is payable semi-annually on February 28 and August 28, at the rate of 12% per annum. The TransTexas Notes are secured by a first priority lien on all of TransTexas’ assets. Thornwood and TransTexas each is indirectly controlled by Carl C. Icahn.

On December 6, 2004, AREP Oil & Gas, pursuant to a membership interest purchase agreement and related assignment and assumption agreement, each dated as of that date, by and among AREP Oil & Gas, as purchaser, and Arnos Corp., High River Limited Partnership and Hopper Investments LLC, as sellers, purchased all of the membership interests of Mid River LLC, a Delaware limited liability company (“Mid River”) for an aggregate purchase price of $38,125,998.63. The assets of Mid River consist of $38 million principal amount of term loans (the “Panaco Debt”) outstanding under the term loan and security agreement, dated as of November 16, 2004, among Panaco, Inc. as borrower, the lenders (as defined therein) and Mid River, as administrative agent. The purchase price for the membership interests in Mid River equals the outstanding principal amount of the Panaco Debt, plus accrued but unpaid interest. The principal is payable in 27 equal quarterly installments of $1,357,142.86 commencing on March 15, 2005, through and including September 15, 2011. Interest is payable quarterly at a rate per annum equal to the LIBOR daily floating rate plus four percent. The term loan is secured by first priority liens on all of Panaco’s assets. Each of the sellers and Panaco is indirectly controlled by Mr. Icahn.

Mr. Icahn indirectly owns approximately 86.5% of AREP’s limited partnership depositary and preferred units and indirectly owns 100% of AREP’s general partner, American Property Investors, Inc. Each of the purchases described above was separately approved by the Audit Committee of AREP’s general partner. The Audit Committee was advised as to each transaction by independent legal counsel and financial advisors. The Audit Committee obtained fairness opinions which opined that, as of the date of each transaction, the consideration to be paid by AREP Oil & Gas was fair from a financial point of view to AREP.

Table of Contents
Exhibit Index
 	 	 	
99.1	 	Purchase Agreement for Notes Issued by TransTexas Gas Corporation, dated December 6, 2004, by and between Thornwood Associates LP, as Seller, and AREP Oil & Gas LLC, as Purchaser.	
 	 	 	
99.2	 	Assignment and Assumption Agreement, dated December 6, 2004, by and between Thornwood Associates LP and AREP Oil & Gas LLC.	
 	 	 	
99.3	 	Membership Interest Purchase Agreement, dated as of December 6, 2004, by and among AREP Oil & Gas LLC, as Purchaser and Arnos Corp., High River Limited Partnership and Hopper Investments LLC, as Sellers.	
 	 	 	
99.4	 	Assignment and Assumption Agreement, dated December 6, 2004, by and among AREP Oil & Gas LLC, Arnos Corp., High River Limited Partnership and Hopper Investments LLC.	
 	 	 	
99.5	 	Amended and Restated Oil & Gas Term Loan Agreement by and among Thornwood Associates LP and TransTexas Gas Corporation and Galveston Bay Pipeline Company and Galveston Bay Processing Corporation, dated August 28, 2003.	
 	 	 	
99.6	 	Amended and Restated Security and Pledge Agreement, dated August 2003, by and among TransTexas Gas Corporation, Galveston Bay Pipeline Company, Galveston Bay Processing Corporation and Thornwood Associates LP.	
 	 	 	
99.7	 	Term Loan and Security Agreement among Panaco, Inc., MidRiver LLC and Lenders Named Herein, dated as of November 16, 2004.	
 	 	 	
[remainder of page intentionally left blank; signature page follows]

Table of Contents
SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 	 	 	 	 	 	 	
 	 	AMERICAN REAL ESTATE PARTNERS, L.P.
(Registrant)	
 	 	 	 	 	 	 	
 	 	By:	 	American Property Investors, Inc.
General Partner	
 	 	 	 	 	 	 	
 	 	 	 	By:	 	/s/ John P. Saldarelli	

 	
 	 	 	 	 	 	John P. Saldarelli	
 	 	 	 	 	 	Vice President, Chief Financial
Officer, Secretary and Treasurer	
 	 	 	 	 	 	 	
Date: December 10, 2004	 	 	 	 	 	 	

EXHIBIT 99.1

SALE OF NOTES

ISSUED BY

TRANSTEXAS GAS CORPORATION

.
.
.

TABLE OF CONTENTS

PAGE

ARTICLE I SALE OF NOTES AND RIGHTS, AND CLOSING.................................       1

1.1   Purchase and Sale.........................................................       1
1.2   Purchase Price............................................................       1
1.3   Closing...................................................................       1
1.4   Actions at the Closing....................................................       1

ARTICLE II REPRESENTATIONS AND WARRANTIES REGARDING SELLER......................       1

2.1   Organization of Seller....................................................       2
2.2   Authority.................................................................       2
2.3   Title.....................................................................       2
2.4   No Conflicts..............................................................       2
2.5   Consents and Approvals....................................................       2
2.6   Brokers...................................................................       2
2.7   Accuracy of Statements....................................................       3

ARTICLE III REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY................       3

3.1   Due Incorporation of Company..............................................       3
3.2   Capitalization............................................................       3
3.3   Subsidiaries..............................................................       3
3.4   Consents and Approvals....................................................       3
3.5   Financial Statements......................................................       4
3.6   No Adverse Effects or Changes.............................................       4
3.7   Title to Properties.......................................................       4
3.8   Litigation................................................................       4
3.9   Claims Against Officers and Directors.....................................       5
3.10  Insurance.................................................................       5
3.11  Compliance with Law.......................................................       5
3.12  Undisclosed Liabilities...................................................       5
3.13  Related Parties...........................................................       5
3.14  Intellectual Property.....................................................       6
3.15  Environmental Matters.....................................................       6
3.16  Employees, Labor Matters, etc.............................................       7
3.17  Employee Benefit Plans....................................................       7
3.18  Property..................................................................       9
3.19  Loan Agreement............................................................       9

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3.20  Tax.......................................................................       9
3.21  Security Interests........................................................      10

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER..........................      10

4.1   Organization of Purchaser.................................................      10
4.2   Authority.................................................................      10
4.3   No Conflicts..............................................................      10

ARTICLE V ASSIGNMENT

AND ASSUMPTION.............................................      11

ARTICLE VI INDEMNIFICATION......................................................      11

6.1   Indemnification by Seller.................................................      11
6.2   Claims....................................................................      11
6.3   Notice of Third Party Claims; Assumption of Defense.......................      12
6.4   Settlement or Compromise..................................................      12
6.5   Failure of Indemnifying Person to Act.....................................      13
6.6   Tax Character.............................................................      13

ARTICLE VII DEFINITIONS.........................................................      13

7.1   Defined Terms.............................................................      13

ARTICLE VIII MISCELLANEOUS......................................................      17

8.1   Investigation.............................................................      17
8.2   Survival of Representations and Warranties................................      17
8.3   Entire Agreement..........................................................      17
8.4   Waiver....................................................................      17
8.5   Amendment.................................................................      18
8.6   No Third Party Beneficiary................................................      18
8.7   Assignment; Binding Effect................................................      18
8.8   Headings..................................................................      18
8.9   Invalid Provisions........................................................      18
8.10  Governing Law.............................................................      18
8.11  Counterparts..............................................................      18
8.12  Waiver of Jury Trial......................................................      18
8.13  Consent to Jurisdiction...................................................      19
8.14  Expenses..................................................................      19
8.15  Notices...................................................................      19

ii

8.16 Further Assurances........................................................       20

iii

This PURCHASE AGREEMENT (the or this "Agreement") dated as of December 6,
2004 is made and entered into by Thornwood Associates L.P., a Delaware limited
partnership, ("Seller") and AREP Oil & Gas LLC, a Delaware limited liability
company ("Purchaser"). Capitalized terms not otherwise defined herein have the
meanings set forth in Article XIII.

WHEREAS, Seller is the owner of $27,500,000 in principal amount of term
notes (the "Notes") issued by TransTexas Gas Corporation ("Company") under an
Amended and Restated Oil & Gas Term Loan Agreement dated as of August 28, 2003
(the "Loan Agreement") constituting 100% of the indebtedness issued under the
Loan Agreement, the original issuance of $32,500,000 having been reduced by a
principal payment of $5 million; and

WHEREAS, Seller desires to sell the Notes together with all rights of
lender under the Loan Agreement and under all related security and other
documents (collectively, the "Documents"), and all related claims, powers and
causes of action (collectively, the "Rights") to Purchaser, and Purchaser
desires to purchase the same, on the terms and subject to the conditions set
forth in this Agreement;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of 4which are hereby acknowledged, the parties hereto
agree as follows:

ARTICLE I
SALE OF NOTES AND RIGHTS, AND CLOSING

1.1 Purchase and Sale. Seller agrees to sell to Purchaser the Notes and
Rights and Purchaser agrees to purchase from Seller the Notes and Rights, at the
Closing on the terms and subject to the conditions set forth in this Agreement.

1.2 Purchase Price The purchase price is $28,245,890.41 (the "Purchase
Price").

1.3 Closing. Upon the terms and subject to the conditions of this
Agreement, the closing of the transactions contemplated hereby (the "Closing")
shall take place simultaneously with the execution and delivery of this
Agreement. The date on which the Closing occurs is herein referred to as the
"Closing Date."

1.4 Actions at the Closing. At the Closing, (i) Purchaser shall pay the
Purchase Price to Seller; (ii) Seller shall cause the Company to deliver to
Purchaser the Note representing the debt underlying the Notes; and (iii) the
parties shall enter into the Assignment Agreement attached hereto as Exhibit A.

ARTICLE II
REPRESENTATIONS AND WARRANTIES REGARDING SELLER

As an inducement to Purchaser to enter into this Agreement, Seller hereby
makes the following representations and warranties to Purchaser:

2.1 Organization of Seller. Seller is a limited partnership duly
organized, validly existing and in good standing under the Laws of the State of
Delaware. Seller has full organizational power and authority to execute and
deliver this Agreement and to perform its obligations hereunder and to
consummate the transactions contemplated hereby, including without limitation to
sell and transfer (pursuant to this Agreement) the Notes and Rights.

2.2 Authority. The execution and delivery by Seller of this Agreement, and
the performance by Seller of its obligations hereunder, have been duly and
validly authorized by Seller and no other action on the part of Seller, its
general partner, its limited partners or its board is necessary for such
execution, delivery or performance. This Agreement has been duly and validly
executed and delivered by Seller and constitutes a legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with its terms.

2.3 Title. The delivery of the Assignment Agreement and other instruments
of transfer delivered by Seller to Purchaser at the Closing will transfer to
Purchaser good and valid title to the Notes and Rights, free and clear of all
Liens other than Liens created by Purchaser.

2.4 No Conflicts. The execution and delivery by Seller of this Agreement
do not, and the performance by Seller of its obligations under this Agreement
and the consummation of the transactions contemplated hereby will not:

(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the organizational documents of Seller;

(b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to Seller or any of its Assets and
Properties; or

(c) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require Seller to obtain any consent, approval or action of, make any
filing with or give any notice to any Person as a result or under the terms of,
(iv) result in or give to any Person any right of termination, cancellation,
acceleration or modification in or with respect to, or (v) result in the
creation or imposition of any Lien upon Seller or any of its Assets and
Properties under, any Contract or License to which Seller is a party or by which
any of its Assets and Properties is bound.

2.5 Consents and Approvals. No consent, authorization or approval of,
filing or registration with, or cooperation from, any Governmental Authority or
any other Person not a party to this Agreement is necessary in connection with
the execution, delivery and performance by Seller of this Agreement or the
consummation of the transactions contemplated hereby.

2.6 Brokers. Neither Seller nor the Company nor any Subsidiary has used
any broker or finder in connection with the transactions contemplated hereby,
and neither Purchaser nor any Affiliate of Purchaser has or shall have any
liability or otherwise suffer or incur any Loss as a result of or in connection
with any brokerage or finder's fee or other commission of any Person retained or
purporting to be retained by Seller or by the Company or any Subsidiary in
connection with any of the transactions contemplated by this Agreement.

2

2.7 Accuracy of Statements. Neither this Agreement nor any schedule,
exhibit, statement, list, document, certificate or other information furnished
or to be furnished by or on behalf of the Company, any Subsidiary or Seller to
Purchaser or any representative or Affiliate of Purchaser in connection with
this Agreement or any of the transactions contemplated hereby contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances in which they are made, not misleading.

ARTICLE III
REPRESENTATIONS AND WARRANTIES REGARDING THE COMPANY

As an inducement to Purchaser to enter into this Agreement, Seller hereby
makes the following representations to Purchaser.

3.1 Due Incorporation of Company.

(a) The Company and each of the Subsidiaries is duly organized and
validly existing under the laws of the state in which it is incorporated or
organized, as the case may be, with all requisite power and authority to own,
lease and operate its properties and to carry on its business as they are now
being owned, leased, operated and conducted. The Company and each of the
Subsidiaries is licensed or qualified to do business and is in good standing
(where the concept of "good standing" is applicable) as a foreign corporation in
each jurisdiction where the nature of the properties owned, leased or operated
by it and the business transacted by it require such licensing or qualification
(except, with respect to the Subsidiaries, where the failure to be so licensed
or qualified or be in good standing will not in the aggregate adversely affect
the validity or enforceability of this Agreement or have a Material Adverse
Effect on any of the Subsidiaries).

(b) The Seller has delivered to Purchaser true, correct and complete
copies of the organizational documents of the Company and the Subsidiaries,
which organizational documents are in full force and effect.

3.2 Capitalization. The Seller owns 100% of the stock of the Company, free
and clear of all Liens. No Person holds any option, warrant, convertible
security or other right to acquire any interest in the Company or any of the
Subsidiaries. There are no obligations, contingent or otherwise, of the Company
or the Subsidiaries to repurchase, redeem or otherwise acquire any ownership
interests of the Company or any Subsidiary or to provide funds to or make any
material investment (in the form of a loan, capital contribution or otherwise)
in any Subsidiary or any other Person.

3.3 Subsidiaries. The Company has no subsidiaries other than Galveston Bay
Pipeline Company and Galveston Bay Processing Corporation.

3.4 Consents and Approvals. No consent, authorization or approval of,
filing or registration with, or cooperation from, any Governmental Authority or
any other Person not a party to this Agreement is necessary in connection with
the execution, delivery and performance

3

by Seller of its respective obligations under this Agreement or the consummation
by Seller of its respective transactions contemplated hereby.

3.5 Financial Statements.

(a) The Seller has delivered to Purchaser true, correct and complete
copies of the Financial Statements. The Audited 2003 Financial Statements have
been prepared in accordance with GAAP consistently applied and present fairly
the financial position, assets, liabilities and retained earnings of the
respective companies as of the dates thereof and the revenues, expenses, results
of operations, and cash flows of the respective companies for the periods
covered thereby. The Financial Statements are in accordance with the books and
records of the respective companies, do not reflect any transactions which are
not bona fide transactions and do not contain any untrue statement of a material
fact (whether or not required to be disclosed under GAAP) or omit to state any
material fact necessary to make the statements contained therein, in light of
the circumstances in which they were made, not misleading.

(b) The Seller have delivered to Purchaser true and complete copies
of all Interim 2004 Financial Statements. The Interim 2004 Financial Statements
present fairly the financial position, assets, liabilities and retained earnings
of the respective companies as of the dates thereof and the revenues, expenses,
results of operations, and cash flows of the respective companies for the
periods covered thereby. The Interim 2004 Financial Statements are in accordance
with the books and records of the respective companies, do not reflect any
transactions which are not bona fide transactions and do not contain any untrue
statement of a material fact (whether or not required to be disclosed under
GAAP) or omit to state any material fact necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.

3.6 No Adverse Effects or Changes. Since December 31, 2003, (i) neither
the Company nor any of the Subsidiaries has suffered any Material Adverse
Effect; (ii) there has been no change, event, development, damage or
circumstance affecting the Company or the Subsidiaries that, individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect on
the Company or any of the Subsidiaries; (iii) there has not been any change by
the Company or any of the Subsidiaries in its accounting methods, principles or
practices, or any revaluation by the Company or any of the Subsidiaries of any
of its assets, including writing down the value of inventory or writing off
notes or accounts receivable; and (iv) the Company and each of the Subsidiaries
has conducted its business only in the ordinary course of business consistent
with past practice.

3.7 Title to Properties. Each of the Company and its Subsidiaries has good
and marketable title to, and each Subsidiary is the lawful owner of, all of the
tangible and intangible assets, properties and rights used in connection with
its respective businesses and all of the tangible and intangible assets,
properties and rights reflected in the Financial Statements, except for changes
accruing in the ordinary course of business that would not, individually or in
the aggregate, adversely affect the ability of the Company or any of the
Subsidiaries to conduct its business in the ordinary course, consistent with
past practice.

3.8 Litigation. Except as disclosed in the Financial Statements, there are
no actions, suits, arbitrations, regulatory proceedings or other litigation,
proceedings or governmental

4

investigations, with such exceptions as are individually, or in the aggregate,
not material in nature or amount, pending or, to the knowledge of Seller,
threatened against or affecting the Company, the Subsidiaries or any of their
respective officers, directors, employees or agents in their capacity as such,
or any of the Company's Assets and Properties or businesses of the Company or
any of the Subsidiaries, and to Seller' knowledge, any facts or circumstances
which may give rise to any of the foregoing. Except as disclosed in the
Financial Statements, neither the Company nor any of the Subsidiaries is subject
to any order, judgment, decree, injunction, stipulation or consent order of or
with any court or other Governmental Authority.

3.9 Claims Against Officers and Directors. There are no pending or, to the
knowledge of Seller, threatened claims against any director, officer, employee
or agent of the Company, the Subsidiaries or any other Person, which could give
rise to any claim for indemnification against the Company or the Subsidiaries or
cause the Company or the Subsidiaries to incur any material liability or
otherwise suffer or incur any material Loss.

3.10 Insurance. The Subsidiaries maintain insurance policies that provide
adequate and suitable insurance coverage for the business of the Subsidiaries
and are on such terms, cover such risks and are in such amounts as the insurance
customarily carried by comparable companies of established reputation similarly
situated and carrying on the same or similar business.

3.11 Compliance with Law. Except as set forth in the Financial Statements,
the Company and the Subsidiaries are in compliance and, at all times, have been
in compliance in all respects with all applicable Laws relating to the Company
or the Subsidiaries or their respective Assets and Properties or businesses.
Except as disclosed in the Financial Statements, no investigation or review by
any governmental authority or self-regulatory authority is pending or, to the
knowledge of the Seller, threatened, nor has any such authority indicated orally
or in writing to the Seller, the Company or any of the Subsidiaries an intention
to conduct an investigation or review of the Company or any of the Subsidiaries
or, with respect to the Company or any of the Subsidiaries, of the Seller.

3.12 Undisclosed Liabilities. Except as disclosed in the Financial
Statements and the Interim 2004 Financial Statements, neither the Company nor
any of the Subsidiaries has any material liabilities or obligations of any
nature, whether known or unknown, absolute, accrued, contingent or otherwise and
whether due or to become due, other than liabilities and obligations incurred
after September 30, 2004 in the ordinary course of business consistent with past
practice (including as to amount and nature).

3.13 Related Parties. Except as disclosed in the Financial Statements and
except for transactions between the Company and the Subsidiaries or between the
Company's Subsidiaries, (i) no Affiliate of the Company is a party to any
Contract with the Company or any of the Subsidiaries; (ii) no Affiliate of the
Company owes any material amount of money to, nor is such Affiliate owed any
material amount of money by, the Company or any of the Subsidiaries, (iii)
neither the Company nor any of the Subsidiaries has, directly or indirectly,
guaranteed or assumed any indebtedness for borrowed money or otherwise for the
benefit of an Affiliate of the Company or any of the Subsidiaries; and (iv)
neither the Company nor any of the Subsidiaries has made any material payment
to, or engaged in any material transaction with, an Affiliate of

5

the Company, other than the existing management agreement with National Energy
Group, Inc. ("NEG"), as disclosed in the public disclosure documents of NEG.

3.14 Intellectual Property. The Company and the Subsidiaries own, or
possess adequate rights to use, all material patents, trade names, trademarks,
copyrights, inventions, processes, designs, formulae, trade secrets, know-how
and other intellectual property rights necessary for, used or held for use in
the conduct of their businesses. All material intellectual property necessary
for used or held for use in the conduct of the businesses of the Company and any
of the Subsidiaries has been duly registered with, filed in or issued by the
relevant filing offices, domestic or foreign, to the extent necessary or
desirable to ensure full protection under any applicable Law, and such
registrations, filings or issuances remain in full force and effect.

The conduct of the business of the Company and the Subsidiaries does not
infringe or otherwise conflict with any rights of any Person in respect of
intellectual property rights. None of the intellectual property rights owned by
the Company or the Subsidiaries is being infringed or otherwise, in any way,
used or available for use by any Person without a license or permission from the
Company and the Subsidiaries and neither the Company nor any of the Subsidiaries
has taken or omitted to take any action which would have the effect of waiving
any of its rights thereunder. Neither the Company nor any of the Subsidiaries
has received a claim of infringement or conflict by any third party in respect
of any intellectual property used by the Company or the Subsidiaries.

3.15 Environmental Matters. Except as set forth in the Financial
Statements:

(a) The Company and each of the Subsidiaries have obtained all
material Environmental Permits that are required with respect to their
respective Assets and Properties and businesses, either owned or leased;

(b) The Company, each of the Subsidiaries, and their respective
Assets and Properties and businesses, are and have been in compliance in all
material respects with all terms and conditions of all applicable Environmental
Laws and Environmental Permits;

(c) There are no Environmental Claims pending or, to the knowledge
of the Seller, threatened against the Company or any of the Subsidiaries.
Neither the Company nor any of the Subsidiaries has received any notice from any
Governmental or Regulatory Authority or any person of any violation or liability
arising under any Environmental Law or Environmental Permit in connection with
its Assets and Properties, businesses or operations;

(d) Neither the Company, nor any of its Subsidiaries, nor any other
Person has caused or taken any action that will result in any material
liability, obligation or cost on the part of the Company or any of its
Subsidiaries relating to (x) environmental conditions on, above, under or from
any properties or assets currently or formerly owned, leased, operated or used
by the Company or any of its Subsidiaries, or (y) the past or present use,
management, transport, treatment, generation, storage, disposal, release or
threatened release of Hazardous Materials.

(e) Neither the Company nor any of the Subsidiaries owns, leases or
operates or has owned, leased or operated, any property listed on the National
Priorities List pursuant to

6

CERCLA or on the CERCLIS or on any other federal or state list as sites
requiring investigation or cleanup;

(f) Neither the Company nor any of the Subsidiaries is transporting,
has transported, or is arranging for the transportation of, any Hazardous
Material to any location which is listed on the National Priorities List
pursuant to CERCLA, on the CERCLIS, or on any similar federal or state list or
which is the subject of federal, state or local enforcement actions or other
investigations that may lead to material claims against the Company or the
Subsidiaries for investigative or remedial work, damage to natural resources,
property damage or personal injury including claims under CERCLA;

(g) There are no sites, locations or operations at which the Company
or any of the Subsidiaries is currently undertaking, or has completed, any
investigative, remedial, response or corrective action as required by
Environmental Laws;

(h) There are no physical or environmental conditions existing on
any property owned or leased by the Company or the Subsidiaries resulting from
their respective operations or activities, past or present, at any location,
that would give rise to any material on-site or off-site investigative or
remedial obligations or any corrective action under any applicable Environmental
Laws; and

(i) The Seller has provided to Purchaser all material environmental
site assessments, audits, investigations and studies in its possession, custody
or control.

3.16 Employees, Labor Matters, etc. Except as set forth in the Financial
Statements, neither the Company nor any of the Subsidiaries is a party to or
bound by, and none of their employees is subject to, any collective bargaining
agreement, and there are no labor unions or other organizations representing,
purporting to represent or attempting to represent any employees employed by the
Company or any of the Subsidiaries. There has not occurred or been threatened
any material strike, slow down, picketing, work stoppage, concerted refusal to
work overtime or other similar labor activity with respect to any employees of
the Company or any of the Subsidiaries. There are no labor disputes currently
subject to any grievance procedure, arbitration or litigation and there is no
representation petition pending or threatened with respect to any employee of
the Company or any of the Subsidiaries. The Company and the Subsidiaries have
complied with all applicable Laws pertaining to the employment or termination of
employment of their respective employees, including, without limitation, all
such Laws relating to labor relations, equal employment opportunities, fair
employment practices, prohibited discrimination or distinction and other similar
employment activities; except for any failure to comply that, individually and
in the aggregate, is not reasonably likely to result in any Company Material
Adverse Effect.

3.17 Employee Benefit Plans.

(a) Except as set forth in the Financial Statements or accrued
thereafter in accordance with the terms of the Plans as of the date hereof,
neither the Company nor any of the Subsidiaries has incurred any material
liability, and no event, transaction or condition has occurred or exists that
could result in any material liability, on account of any Plans, including but
not limited to liability for (i) additional contributions required to be made
under the terms of

7

any Plan or its related trust, insurance contract or other funding arrangement
with respect to periods ending on or prior to the date hereof which are not
reflected, reserved against or accrued in the Financial Statements; (ii)
breaches by the Company or any of the Subsidiaries, or any of their employees,
officers, directors, stockholders, or, to the knowledge of Seller, the trustees
under the trusts created under the Plans, or any other Persons under ERISA or
any other applicable Law; or (iii) income taxes by reason of non-qualification
of the Plans. Each of the Plans has been operated and administered in all
material respects in compliance with its terms, all applicable Laws and all
applicable collective bargaining agreements. Except with respect to the increase
in employer matching contributions under the Subsidiaries' 401(k) plans, since
the date of the Financial Statements, neither the Company nor any of the
Subsidiaries has communicated to any current or former director, officer,
employee or consultant thereof any intention or commitment to amend or modify
any Plan, or to establish or implement any other employee or retiree benefit or
compensation plan or arrangement, which would materially increase the cost to
the Company or any Subsidiary.

(b) Each Plan which is intended to be "qualified" within the meaning
of section 401 (a) of the Code, and the trust (if any) forming a part thereof
has received a favorable determination letter or is covered by an opinion letter
from the Internal Revenue Service and no event has occurred and no condition
exists which could reasonably be expected to result in the revocation of any
such determination. All amendments and actions required to bring each Plan into
conformity with the applicable provisions of ERISA, the Code, and any other
applicable Laws have been made or taken.

(c) There are no pending or threatened claims (and no facts or
circumstances exist that could give rise to any such claims) by or on behalf of
any participant in any of the Plans, or otherwise involving any such Plan or the
assets of any Plan, other than routine claims for benefits in the ordinary
course. The Plans are not presently under audit or examination (nor has notice
been received of a potential audit or examination) by the IRS, the Department of
Labor, or any other Governmental or Regulatory Authority.

(d) None of the Plans provides benefits of any kind with respect to
current or former employees, officers, or directors (or their beneficiaries) of
the Company and the Subsidiaries beyond their retirement or other termination of
employment, other than (i) coverage for benefits mandated by Section 4980B or
the Code, (ii) death benefits or retirement benefits under an employee pension
benefit plan (as defined by section 3(2) of ERISA), or (iii) benefits, the full
cost of which is borne by such current or former employees, officers, directors,
or beneficiaries.

(e) No Plan sponsored by the Company and the Subsidiaries is a
"multiemployer plan" within the meaning of Section 4001 (a)(3) of ERISA or a
"multiple employer plan" as addressed in section 4063 or 4064 of ERISA. No Plan
sponsored by the Company and the Subsidiaries is subject to Title IV of ERISA.

(f) The consummation of the transactions contemplated by this
Agreement will not (alone or in combination with any other event, including,
without limitation, the passage of time) result in (i) any payment (including,
without limitation, severance, unemployment compensation, golden parachute,
bonus payments or otherwise) becoming due under any agreement or oral
arrangement to any current or former director, officer, employee or consultant

8

of the Company and the Subsidiaries, (ii) any increase in the amount of salary,
wages or other benefits payable to any director, officer, employee or consultant
of the Company and the Subsidiaries, or (iii) any acceleration of the vesting or
timing of payment of any benefits or compensation (including, without
limitation, any increased or accelerated funding obligation) payable to any
director, officer, employee or consultant of the Company and the Subsidiaries.

3.18 Property. The Company and the Subsidiaries are in possession of and
have good title to, or have valid leasehold interests in or valid rights under
contract to use, all of the material, real and tangible personal property used
or held for use in the business of the Company or the Subsidiaries. All such
personal property is in good working order and condition, ordinary wear and tear
excepted, and its use complies in all material respects with all applicable
Laws.

3.19 Loan Agreement. The representations and warranties of the Company and
its Subsidiaries set forth in the Loan Agreement are true and correct. The
Company and its Subsidiaries have complied in all material respects with all of
the terms and conditions of the Loan Agreement and the other Documents. There is
no event of default, as defined in the Loan Agreement.

3.20 Tax.

(a) The Company and the Subsidiaries have duly and timely filed with
the appropriate taxing authorities all material federal, state and local income
Tax Returns and all other material Tax Returns required to be filed through the
date hereof and will duly and timely file any such returns required to be filed
on or prior to the Closing. Such Tax Returns and other information filed are
(and, to the extent they will be filed prior to the Closing, will be) complete
and accurate in all material respects. Neither the Company nor the Subsidiaries
have pending any request for an extension of time within which to file federal,
state or local income Tax Returns.

(b) All Taxes of the Company and the Subsidiaries in respect of
periods (or portions thereof) ending at or prior to the Closing (i) have been
paid by the Company and the Subsidiaries or, (ii) after the Closing, will be
paid by the Seller, or such Taxes (other than income Taxes) are shown as due and
payable after the Closing on the financial statements of the Companies and the
Subsidiaries in accordance with GAAP.

(c) No federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently pending with
regard to any material Taxes or material Tax Returns of the Company or the
Subsidiaries. Neither the Company nor any of the Subsidiaries has received a
written notice of any such pending audits or proceedings. There are no
outstanding waivers extending the statutory period of limitation relating to the
payment of Taxes due from the Company or any of the Subsidiaries.

(d) Neither the IRS nor any other taxing authority (whether domestic
or foreign) has asserted in writing, or to the best knowledge of the Company and
the Subsidiaries, is threatening to assert, against the Company or any of the
Subsidiaries any material deficiency or material claim for Taxes in excess of
the reserves established therefor.

9

(e) There are no Liens for Taxes upon any property or assets of the
Company or any of the Subsidiaries, except for Liens for Taxes not yet due and
payable and liens for Taxes that are being contested in good faith by
appropriate proceedings as set forth on Schedule 3.20(e) and as to which
adequate reserves have been established in accordance with GAAP.

(f) Neither the Company nor the Subsidiaries has any obligation
under any Tax sharing agreement or similar arrangement with any other Person
with respect to Taxes of such other Person.

3.21 Security Interests. As of the Closing, the Purchaser shall have a
legal, valid and enforceable, first priority perfected security interest in all
right, title and interest of each of the Company and the guarantor in the
"Collateral" described in the Documents. All liens granted under the Loan
Agreement are and will be as of the Closing, for all purposes, valid, perfected,
enforceable, non-avoidable and effective as of the Closing without any further
action by the Purchaser, the Seller, the Company or any other party.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser hereby represents and warrants to Seller as follows:

4.1 Organization of Purchaser. Purchaser is a limited liability company
duly formed, validly existing and in good standing under the Laws of the State
of Delaware. Purchaser has full organizational power and authority to execute
and deliver this Agreement and to perform Purchaser's obligations hereunder and
to consummate the transactions contemplated hereby, including without limitation
to buy pursuant to this Agreement the Notes and the Rights.

4.2 Authority. The execution and delivery by Purchaser of this Agreement,
and the performance by Purchaser of its obligations hereunder, have been duly
and validly authorized and, no other limited liability company action on the
part of Purchaser is necessary. This Agreement has been duly and validly
executed and delivered by Purchaser and constitutes a legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms.

4.3 No Conflicts. The execution and delivery by Purchaser of this
Agreement do not, the performance by Purchaser of its obligations under this
Agreement and the consummation of the transactions contemplated hereby, will
not:

(a) conflict with, or result in a violation or breach of, any of the
terms, conditions or provisions of the organizational documents of Purchaser;

(b) conflict with, or result in a violation or breach of, any term
or provision of any Law or Order applicable to Purchaser or any of its Assets
and Properties (other than such conflicts, violations or breaches which will not
have a Material Adverse Effect on Purchaser); or

(c) (i) conflict with, or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require Purchaser to obtain any

10

consent, approval or action of, make any filing with or give any notice to any
Person as a result or under the terms of, (iv) result in or give to any Person
any right of termination, cancellation, acceleration or modification in or with
respect to, or (v) result in the creation or imposition of any Lien upon
Purchaser or any of its Assets and Properties under, any Contract or License to
which Purchaser is a party or by which any of its Assets and Properties is
bound.

ARTICLE V
ASSIGNMENT AND ASSUMPTION

At the Closing, Seller and Purchaser shall enter into the Assignment Agreement
pursuant to which Seller will transfer, assign, convey and grant to Purchaser,
its successors and assigns forever 100% of the Notes and the Rights.

ARTICLE VI
INDEMNIFICATION

6.1 Indemnification by Seller. Seller agrees to indemnify Purchaser, its
Affiliates and their respective officers, directors, employees independent
contractors, stockholders, principals, partners, agents, or representatives
(each an "Indemnified Person" and collectively, the "Indemnified Persons")
against, and to hold each Indemnified Person harmless from, any and all Losses
incurred or suffered by any Indemnified Person relating to or arising out of or
in connection with (a) any breach of or any inaccuracy in any representation or
warranty made by Seller in this Agreement, or (b) any breach of or failure by
any Seller to perform any of its covenants or obligations set out or
contemplated in this Agreement.

6.2 Claims. As promptly as is reasonably practicable after becoming aware
of a claim for indemnification under this Agreement, the Indemnified Person
shall promptly give notice to the Seller ("Indemnifying Person") of such claim
and the amount the Indemnified Person will be entitled to receive hereunder from
the Indemnifying Person; provided that the failure of the Indemnified Person to
promptly give notice shall not relieve the Indemnifying Person of its
obligations except to the extent (if any) that the Indemnifying Person shall
have been prejudiced thereby. If the Indemnifying Person does not object in
writing to such indemnification claim within 30 days of receiving notice
thereof, the Indemnified Person shall be entitled to recover, on the
thirty-fifth day after such notice was given, from the Indemnifying Person the
amount of such claim, and no later objection by the Indemnifying Person shall be
permitted; if the Indemnifying Person agrees that it has an indemnification
obligation but objects that it is obligated to pay only a lesser amount, the
Indemnified Person shall nevertheless be entitled to recover, on the thirty-
fifth day after such notice was given, from the Indemnifying Person the lesser
amount, without prejudice to the Indemnified Person's claim for the difference.
In addition to the amounts recoverable by the Indemnified Person from the
Indemnifying Person pursuant to the foregoing provisions, the Indemnified Person
shall also be entitled to recover from the Indemnifying Person interest on such
amounts at the rate of Two Times Prime from, and including, the thirty- fifth
day after such notice of an indemnification claim is given to, but not
including, the date such recovery is actually made by the Indemnified Person.

11

6.3 Notice of Third Party Claims; Assumption of Defense. The Indemnified
Person shall give notice as promptly as is reasonably practicable to the
Indemnifying Person of the assertion of any claim, or the commencement of any
suit, action or proceeding, by any Person not a party hereto (a "Third Party
Claim") in respect of which indemnity may be sought under this Agreement;
provided that the failure of the Indemnified Person to promptly give notice
shall not relieve the Indemnifying Person of its obligations except to the
extent (if any) that the Indemnifying Person shall have been prejudiced thereby.
The Indemnifying Person may, at its own expense, participate in the defense of
any Third Party Claim, suit, action or proceeding (a) upon notice to the
Indemnified Person and (b) upon delivery by the Indemnifying Person to the
Indemnified Person a written agreement that the Indemnified Person is entitled
to indemnification for all Losses arising out of such Third Party Claim, suit,
action or proceeding and that the Indemnifying Person shall be liable for the
entire amount of any Loss, at any time during the course of any such Third Party
Claim, suit, action or proceeding, assume the defense thereof; provided,
however, that (i) the Indemnifying Person's counsel is reasonably satisfactory
to the Indemnified Person, and (ii) the Indemnifying Person shall thereafter
consult with the Indemnified Person upon the Indemnified Person's reasonable
request for such consultation from time to time with respect to such Third Party
Claim, suit, action or proceeding. If the Indemnifying Person assumes such
defense, the Indemnified Person shall have the right (but not the duty) to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the Indemnifying Person. If, however, the
Indemnified Person reasonably determines in its judgment that representation by
the Indemnifying Person's counsel of both the Indemnifying Person and the
Indemnified Person would present such counsel with a conflict of interest, then
such Indemnified Person may employ separate counsel to represent or defend it in
any such Third Party Claim, action, suit or proceeding and the Indemnifying
Person shall pay all of the fees and disbursements in connection with the
retention of such separate counsel. If the Indemnifying Person fails to promptly
notify the Indemnified Party that the Indemnifying Party desires to defend the
Third Party Claim pursuant, or if the Indemnifying Person gives such notice but
fails to prosecute vigorously and diligently or settle the Third Party Claim,
then the Indemnified Party will have the right to defend, at the sole cost and
expense of the Indemnifying Person, the Third Party Claim by all appropriate
proceedings, which proceedings will be prosecuted by the Indemnifying Person in
good faith or will be settled at the discretion of the Indemnifying Person (with
the consent of the Indemnifying Person, which consent will not be unreasonably
withheld). The Indemnifying Person will have full control of such defense and
proceedings, including any compromise or settlement thereof. Whether or not the
Indemnifying Person chooses to defend or prosecute any such Third Party Claim,
suit, action or proceeding, all of the parties hereto shall cooperate in the
defense or prosecution thereof.

6.4 Settlement or Compromise. Any settlement or compromise made or caused
to be made by the Indemnified Person or the Indemnifying Person, of any claim,
suit, action or proceeding shall also be binding upon the Indemnifying Person or
the Indemnified Person, as the case may be, in the same manner as if a final
judgment or decree had been entered by a court of competent jurisdiction in the
amount of such settlement or compromise thereof; provided, however, that no
obligation, restriction or Loss shall be imposed on the Indemnified Person as a
result of such settlement without its prior written consent. The Indemnified
Person will give the Indemnifying Person at least 30 days' notice of any
proposed settlement or compromise of any Third Party Claim, suit, action or
proceeding it is defending, during which time the Indemnifying Person may reject
such proposed settlement or compromise; provided, however, that from and

12

after such rejection, the Indemnifying Person shall be obligated to assume the
defense of and full and complete liability and responsibility for such Third
Party Claim, suit, action or proceeding and any and all Losses in connection
therewith in excess of the amount of unindemnifiable Losses which the
Indemnified Person would have been obligated to pay under the proposed
settlement or compromise.

6.5 Failure of Indemnifying Person to Act. In the event that the
Indemnifying Person does not assume the defense of any Third Party Claim, suit,
action or proceeding brought against an Indemnified Person, then any failure of
the Indemnified Person to defend or to participate in the defense of any such
Third Party Claim, suit, action or proceeding or to cause the same to be done,
shall not relieve the Indemnifying Person of any of its obligations under this
Agreement.

6.6 Tax Character. Seller and Purchaser agree that any payments pursuant
to this Article VI will be treated for federal and state income tax purposes as
adjustments to the purchase price of the Membership Interest, and that they will
report such payments on all Tax Returns consistently with such characterization.

ARTICLE VII
DEFINITIONS

7.1 Defined Terms. As used in this Agreement, the following defined terms
have the meanings indicated below:

"Affiliate" means, with respect to any specified Person, any other Person
that, directly or indirectly, owns or controls, is under common ownership or
control with, or is owned or controlled by, such specified Person.

"Agreement" has the meaning ascribed to it in the recitals.

"Assets and Properties" of any Person means all assets and properties of
every kind, nature, character and description (whether real, personal or mixed,
whether tangible or intangible, and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person.

"Assignment Agreement" has the meaning ascribed to it in Section 1.4.

"Audited 2003 Financial Statements" means the audited financial statements
of the Company as of December 31, 2003, consisting of the balance sheet at such
date and the related statements of operations, statement of members' equity, and
cash flows for the year then ended, each accompanied by the audit report of its
independent public auditors of the Company.

"Business Day" means any day of the year other than (i) any Saturday or
Sunday or (ii) any other day on which commercial banks located in New York City
are generally closed for business.

13

"Business or Condition" of any Person means the business, condition
(financial or otherwise), properties, assets or results of operations or
prospects of such Person, taken as a whole.

"CERCLA" means the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, or any successor statutes and any regulations
promulgated thereunder.

"CERCLIS" means the Comprehensive Environmental Response, Compensation and
Liability Information System List.

"Closing" has the meaning ascribed to it in Section 1.3.

"Closing Date" means the closing date of the transactions contemplated by
Section 1.3.

"Contract" means any contract, lease, commitment, understanding, sales
order, purchase order, agreement, indenture, mortgage, note, bond, right,
warrant, instrument, plan, permit or license, whether written or oral, which is
intended or purports to be binding and enforceable.

"Documents" has the meaning ascribed to it in the Recitals.

"Dollars" or numbers proceeded by the symbol "$" means amounts in United
States Dollars.

"Environmental Claim" means any third party (including, without
limitations, governmental agencies and employees) action, lawsuit, claim or
proceeding (including claims or proceedings under OSHA or similar laws relating
to safety of employees) that seeks to impose liability for (a) pollution or
contamination of the ambient air, surface water, ground water or land; (b)
solid, gaseous or liquid waste generation, handling, treatment, storage,
disposal or transportation; (c) exposure to hazardous or toxic substances; (d)
the safety or health of employees; or (e) the transportation, processing,
distribution in commerce, use or storage of hydrocarbons or chemical substances.
An Environmental Claim includes, but is not limited to, a common law action, as
well as a proceeding to issue, modify or terminate an Environmental Permit.

"Environmental Law" means any law, rule, regulation or order of other
requirements of law (including common law) any federal, foreign, state or local
executive, legislative, judicial, regulatory or administrative agency, board or
authority with jurisdiction over the Company or any of the Subsidiaries or any
of their respective properties or assets that relates to (a) pollution or
protection of human health, natural resources and the environment, including
ambient air, surface water, ground water or land; (b) solid, gaseous or liquid
waste generation, treatment, storage, disposal or transportation; (c) exposure
to Hazardous Materials; (d) the safety or health of employees; or (e) regulation
of the manufacture, processing, distribution in commerce, use or storage of
Hazardous Materials, including hydrocarbons or chemical substances.
Environmental Laws include but are not limited to OSHA, CERCLA, the Clean Air
Act, as amended, the Federal Water Pollution Control Act, as amended, the Rivers
and Harbors Act of 1899, as amended, the Safe Drinking Water Act, as amended,
the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), as amended,
the Resource Conservation and Recovery

14

Act of 1976 ("RCRA"), as amended, the Hazardous and Solid Waste Amendments Act
of 1984, as amended, the Toxic Substances Control Act, as amended, the Oil
Pollution Act of 1990 ("OPA"), as amended, the Hazardous Materials
Transportation Act, as amended, and any other federal, foreign, state and local
law whose purpose is to conserve or protect human health, the environment,
wildlife or natural resources.

"Environmental Permit" means any permit, license, approval or other
authorization under any Environmental Law, applicable law, regulation and other
requirement of the United States or any foreign country or of any state,
municipality or other subdivision thereof relating to pollution or protection of
health or the environment, including laws, regulations or other requirements
relating to emissions, discharges, releases or threatened releases of
pollutants, contaminants or hazardous substances or toxic materials or wastes
into ambient air, surface water, ground water or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transportation or handling of hydrocarbons or chemical subsidiaries, pollutants,
contaminants or hazardous or toxic materials or wastes.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"Financial Statements" means the Audited 2003 Financial Statements and the
Interim 2004 Financial Statements.

"GAAP" means U.S. generally accepted accounting principles at the time in
effect.

"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, administrative or other agency, commission, gaming
authority, licensing board official or other instrumentality of the United
States or any state, county, city or other political subdivision.

"Hazardous Material" means (a) any "hazardous substance," as defined by
CERCLA; (b) any "hazardous waste" or "solid waste," in either case as defined by
the Resource Conservation and Recovery Act, as amended; (c) any hazardous,
dangerous or toxic chemical, material, waste or substance, regulated by any
Environmental Law; (d) any radioactive material, including any naturally
occurring radioactive material, and any source, special or byproduct material as
defined in 42 U.S.C. 2011 et seq. and any amendments or authorizations thereof;
(e) any asbestos-containing materials in any form or condition; (f) any
polychlorinated biphenyls in any form or condition; (g) petroleum, petroleum
hydrocarbons, or any fraction or byproducts thereof; (h) any air pollutant which
is so designated by the U.S. Environmental Protection Agency as authorized by
the Clean Air Act; or (i) any mold or microbial/microbiological contaminants
that pose a risk to human health or the environment.

"Interim 2004 Financial Statements" means the unaudited internal financial
statements of the Company for the nine months ended September 30, 2004,
consisting of the balance sheet at such date and the related statements of
operations for the period then ended.

"Knowledge" or "knowledge" means, with respect to the Seller, the Company
and/or the Subsidiaries, in each case the knowledge of any director, officer,
senior executive, or member of any of Seller, Company or any Subsidiary or Carl
C. Icahn.

15

"Laws" means all laws, statutes, rules, regulations, ordinances and other
pronouncements having the effect of law of the United States or any state,
county, city or other political subdivision or of any Governmental or Regulatory
Authority.

"License" means licenses, permits, certificates of authority,
authorizations, approvals, registrations, findings of suitability, variances,
exemptions, certificates of occupancy, orders, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.

"Lien" means any mortgage, lien (except for any lien for Taxes not yet due
and payable), charge, restriction, pledge, security interest, option, lease or
sublease, claim, right of any third party, easement, encroachment, encumbrance
or other adverse claim of any kind or description.

"Loss" or "Losses" means any and all liabilities, losses, costs, claims,
damages (including consequential damages), penalties and expenses (including
attorneys' fees and expenses and costs of investigation and litigation).

"Material Adverse Effect" or "Material Adverse Change," as to any Person,
means a material adverse change (or circumstance involving a prospective change)
in the Business or Condition of such Person.

"National Priorities List" means the list of priority contaminated sites
maintained by the United States Environmental Protection Agency as contemplated
by Section 105 of CERCLA.

"Notes" has the meaning ascribed to it in the Recitals.

"Order" means any writ, judgment, decree, injunction or similar order of
any Governmental or Regulatory Authority (in each such case whether preliminary
or final).

"OSHA" means the Occupational Safety and Health Act, as amended, or any
successor statute, and any regulations promulgated thereunder.

"Person" means any natural person, corporation, limited liability company,
general partnership, limited partnership, proprietorship, other business
organization, trust, union, association or Governmental or Regulatory Authority.

"Plans" shall mean all material pension and profit sharing, retirement and
post retirement welfare benefit, health insurance benefit (medical, dental and
vision), disability, life and accident insurance, sickness benefit, vacation,
employee loan and banking privileges, bonus, incentive, deferred compensation,
workers compensation, stock purchase, stock option, phantom stock and other
equity-based, severance, employment, change of control or fringe benefit plans,
programs, arrangements or agreements, whether written or oral, including any
employee benefit plans defined in Section 3(3) of ERISA, maintained or
contributed to by the Company or any of the Subsidiaries.

"Purchaser" has the meaning ascribed to it in the recitals of this
Agreement.

"Rights" has the meaning ascribed to it in the Recitals.

"Seller" has the meaning ascribed to it in the recitals of this Agreement.

16

"Subsidiary" means Galveston Bay Pipeline Company and Galveston Bay
Processing Corporation.

"Tax Return" means any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including attachments
thereto and amendments thereof, and including, without limitation, information
returns, any documents with respect to or accompanying payments of estimated
Taxes, or with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.

"Taxes" means any and all taxes, charges, fees, levies, duties,
liabilities, impositions or other assessments, including, without limitation,
income, gross receipts, profits, excise, real or personal property,
environmental, recapture, sales, use, value-added, withholding, social security,
retirement, employment, unemployment, occupation, service, license, net worth,
payroll, franchise, gains, stamp, transfer and recording taxes, fees and
charges, imposed by the Internal Revenue Service ("IRS") or any other taxing
authority (whether domestic or foreign including, without limitation, any state,
county, local or foreign government or any subdivision or taxing agency thereof
(including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies, duties, liabilities, impositions or other assessments.

"Tax" shall have a correlative meaning.

"Third Party Claim" has the meaning ascribed to it in Section 6.3.

"Two Times Prime" means two times the prime rate published by Citibank,
N.A.

ARTICLE VIII
MISCELLANEOUS

8.1 Investigation. It shall be no defense to an action for breach of this
Agreement that Purchaser or its agents have (or have not) made investigations
into the affairs of the Company or that the Company or Seller could not have
known of the misrepresentation or breach of warranty.

8.2 Survival of Representations and Warranties. The representations and
warranties of the parties hereunder shall survive the Closing.

8.3 Entire Agreement. This Agreement, including the schedules and exhibits
hereto, which are incorporated herein and made an integrated part hereof,
constitutes the entire agreement between the parties hereto and supersedes any
and all prior discussions and agreements between the parties relating to the
subject matter hereof.

8.4 Waiver. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or

17

condition. No waiver by any party of any term or condition of this Agreement, in
any one or more instances, shall be deemed to be or construed as a waiver of the
same or any other term or condition of this Agreement on any future occasion.
All remedies, either under this Agreement or by Law or otherwise afforded, will
be cumulative and not alternative.

8.5 Amendment. This Agreement may be amended, supplemented or modified
only by a written instrument duly executed by or on behalf of each party hereto.

8.6 No Third Party Beneficiary. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and their respective
successors or permitted assigns, and it is not the intention of the parties to
confer third party beneficiary rights upon any other Person, except that each
Indemnified Persons shall be a third party beneficiary of Article VIII.

8.7 Assignment; Binding Effect. No party may assign this Agreement or any
right, interest or obligation hereunder without the prior written consent of the
other Parties. This Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.

8.8 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.

8.9 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provision will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof, and (c)
the remaining provisions of this Agreement will remain in full force and effect
and will not be affected by the illegal, invalid or unenforceable provision or
by its severance here from.

8.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.

8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

8.12 Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THEM AGAINST ANY
OTHER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, OR ANY OTHER
AGREEMENTS EXECUTED IN CONNECTION HEREWITH OR THE ADMINISTRATION THEREOF OR ANY
OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN. No party to this Agreement
shall seek a jury trial in any lawsuit, proceeding, counterclaim, or any other
litigation procedure based upon, or arising out of, this Agreement or any
related instruments or the relationship between the parties. No party will seek
to consolidate any such action in which a jury trial has been waived with any
other action in which a jury trial cannot be or has not been waived. THE
PROVISIONS OF

18

THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE
PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED
WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL
NOT BE FULLY ENFORCED IN ALL INSTANCES.

8.13 Consent to Jurisdiction. Each party irrevocably submits to the
exclusive jurisdiction of any NY State Court in the County of New York or any
courts of the United States of America located in the Southern District of New
York, and each party hereby agrees that all suits, actions and proceedings
brought by such party hereunder shall be brought in any such court. Each party
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding brought in any such court, any claim that any such suit, action or
proceeding brought in such a court has been brought in an inconvenient forum and
the right to object, with respect to any such suit, action or proceeding brought
in any such court, that such court does not have jurisdiction over such party or
the other party. In any such suit, action or proceeding, each party waives, to
the fullest extent it may effectively do so, personal service of any summons,
complaint or other process and agrees that the service thereof may be made by
any means permitted by Section 0 (other than facsimile transmission). Each party
agrees that a final non-appealable judgment in any such suit, action or
proceeding brought in such a court shall be conclusive and binding.

8.14 Expenses. All expenses, costs and fees in connection with the
transactions contemplated hereby (including fees and disbursements of counsel,
consultants and accountants) incurred by (a) Seller shall be paid and borne
exclusively by Seller, and (b) Purchaser shall be paid and borne exclusively by
Purchaser.

8.15 Notices. All notices, request, demands and other communications
hereunder shall be in writing and shall be delivered personally, by certified or
registered mail, return receipt requested, and postage prepaid, by courier, or
by facsimile transmission, addressed as follows:

If to Seller:

Thornwood Associates L.P.
100 South Bedford Road Suite 210
Mt. Kisco, NY 10549

If to Purchaser:

c/o American Real Estate Partners, L.P. 100
South Bedford Rd.
Mt. Kisco, NY 10549

19

With a copy to:

Debevoise & Plimpton LLP 
919 Third Avenue
New York, NY 10022 
Attention: William D. Regner

or to such other address as a party may from time to time designate in writing
in accordance with this Section. Each notice or other communication given to any
party hereto in accordance with the provisions of this Agreement shall be deemed
to have been received (a) on the Business Day it is sent, if sent by personal
delivery, (b) the earlier of receipt of three Business Days after having been
sent by certified or registered mail, return receipt requested and postage
prepaid, (c) on the Business Day it is sent, if sent by facsimile transmission
and an activity report showing the correct facsimile number of the party on whom
notice is served and the correct number of pages transmitted is obtained by the
sender (provided, however, that such notice or other communication is also sent
by some other means permitted by this Section 8.15, or (d) on the first Business
Day after sending, if sent by courier or overnight delivery.

8.16 Further Assurances. Seller covenants and agrees that, from time to
time subsequent to Closing, it will, at the request of Purchaser, execute and
deliver all such documents, including, without limitation, all such additional
conveyances, transfers, consents and other assurances and do all such other acts
and things as Purchaser may from time to time request be executed or done in
order to better evidence, perfect or effect any provision of this Agreement, or
of any agreement or other document executed pursuant to this Agreement, or any
of the respective obligations intended to be created hereby or thereby.

[SIGNATURE PAGE FOLLOWS]

20

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.

THORNWOOD ASSOCIATES L.P.

By: Barberry Corp., its general
partner

By: /s/ Edward E. Mattner
----------------------------------
Name: Edward E. Mattner
Title: Vice President

AREP OIL & GAS LLC

By: American Real Estate Holdings
Limited Partnership, its member

By: American Property Investors,
Inc., its general partner

By: /s/ John P. Saldarelli
-----------------------------
Name: John P. Saldarelli
Title: Chief Financial Officer

[Signature Page to the Purchase Agreement by AREP Oil & Gas LLC and
Thornwood Associates L.P.]

21

Exhibit A

Assignment and Assumption Agreement

Assignment and Assumption Agreement, dated as of December___, 2004,
between Thornwood Associates L.P. (the "Seller") and AREP Oil & Gas LLC (the
"Purchaser"). Capitalized terms used herein shall have the meanings attributed
to them in the Purchase Agreement, dated as of even date herewith, between
Purchaser and Seller (the "Purchase Agreement").

In consideration of the purchase and sale of the Notes and Rights in
accordance with the Purchase Agreement, Purchaser and Seller agree as follows:

1. Seller hereby transfers and conveys all of its right, title and
interest in and to the Notes and Rights to Purchaser.

2. Purchaser hereby accepts all of Seller's right, title and interest in
and to the Notes and Rights.

3. As a result of the foregoing, Purchaser is the sole owner of the Notes
and Rights.

4. Seller hereby assigns to Purchaser all rights under all UCC filings,
mortgages and similar security or perfection documents relating to the Notes and
Rights and, following the date hereof and at the sole cost and expense of Seller
will, at the request of Purchaser, promptly file all assignments and other
documents so requested by Purchaser in respect of the foregoing.

IN WITNESS WHEREOF, the parties have executed this document on
___________________, 2004.

THORNWOOD ASSOCIATES L.P.

By: Barberry Corp., its general partner

By:____________________________________
Name:
Title:

AREP OIL & GAS LLC

By:____________________________________
Name:
Title:

22

EXHIBIT 99.2

Assignment and Assumption Agreement

Assignment and Assumption Agreement, dated as of December 6, 2004,
between Thornwood Associates L.P. (the "Seller") and AREP Oil & Gas LLC (the
"Purchaser"). Capitalized terms used herein shall have the meanings attributed
to them in the Purchase Agreement, dated as of even date herewith, between
Purchaser and Seller (the "Purchase Agreement").

In consideration of the purchase and sale of the Notes and Rights in
accordance with the Purchase Agreement, Purchaser and Seller agree as follows:

1. Seller hereby transfers and conveys all of its right, title and
interest in and to the Notes and Rights to Purchaser.

2. Purchaser hereby accepts all of Seller's right, title and interest in
and to the Notes and Rights.

3. As a result of the foregoing, Purchaser is the sole owner of the Notes
and Rights.

4. Seller hereby assigns to Purchaser all rights under all UCC filings,
mortgages and similar security or perfection documents relating to the Notes and
Rights and, following the date hereof and at the sole cost and expense of Seller
will, at the request of Purchaser, promptly file all assignments and other
documents so requested by Purchaser in respect of the foregoing.

IN WITNESS WHEREOF, the parties have executed this document on December 6,
2004.

THORNWOOD ASSOCIATES L.P.

By: Barberry Corp., its general partner

By: /s/ Edward E. Mattner
------------------------------------
Name: Edward E. Mattner
Title: Vice President

AREP OIL & GAS LLC

By: American Real Estate Holdings
Limited Partnership, its member

By: American Property Investors,
Inc., its general partner

By: /s/ John P. Saldarelli
-------------------------------
Name: John P. Saldarelli
Title: Chief Financial Officer

EXHIBIT 99.3

MEMBERSHIP INTEREST PURCHASE AGREEMENT

Dated as of December 6, 2004

by and among

AREP Oil & Gas LLC, as Purchaser

and

Arnos Corp.,

High River Limited Partnership

and

Hopper Investments LLC, as Sellers

TABLE OF CONTENTS

PAGE

ARTICLE I
SALE OF MEMBERSHIP INTEREST AND CLOSING

1.1   Purchase and Sale.......................................................................................   1
1.2   Purchase Price..........................................................................................   1
1.3   Closing.................................................................................................   1
1.4   Actions at the Closing..................................................................................   2

ARTICLE II
REPRESENTATIONS AND WARRANTIES REGARDING SELLERS

2.1   Organization............................................................................................   2
2.2   Authority...............................................................................................   2
2.3   Title...................................................................................................   2
2.4   No Conflicts............................................................................................   2
2.5   Consents and Approvals..................................................................................   3
2.6   Brokers.................................................................................................   3
2.7   Accuracy of Statements..................................................................................   3

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS

3.1   Due Incorporation of Company............................................................................   3
3.2   Capitalization..........................................................................................   3
3.3   Subsidiaries............................................................................................   4
3.4   Consents and Approvals..................................................................................   4
3.5   Financial Statements....................................................................................   4
3.6   Company Status..........................................................................................   4
3.7   No Adverse Effects or Changes...........................................................................   4
3.8   Credit Agreement........................................................................................   5
3.9   Compliance with Law.....................................................................................   5
3.10  Security Interests......................................................................................   5

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER

4.1   Organization of Purchaser...............................................................................   5
4.2   Authority...............................................................................................   5

i

4.3   No Conflicts............................................................................................   6

ARTICLE V
ASSIGNMENT AND ASSUMPTION

ARTICLE VI
INDEMNIFICATION

6.1   Indemnification by Sellers..............................................................................   6
6.2   Claims..................................................................................................   6
6.3   Notice of Third Party Claims; Assumption of Defense.....................................................   7
6.4   Settlement

or Compromise................................................................................   8
6.5   Failure of Indemnifying Person to Act...................................................................   8
6.6   Tax Character...........................................................................................   8

ARTICLE VII
DEFINITIONS

7.1   Defined Terms...........................................................................................   8

ARTICLE VIII
MISCELLANEOUS

8.1   Investigation...........................................................................................  11
8.2   Survival of Representations and Warranties..............................................................  11
8.3   Entire Agreement........................................................................................  11
8.4   Waiver..................................................................................................  11
8.5   Amendment...............................................................................................  11
8.6   No Third Party Beneficiary..............................................................................  11
8.7   Assignment; Binding Effect..............................................................................  11
8.8   Headings................................................................................................  11
8.9   Invalid Provisions......................................................................................  11
8.10  Governing Law...........................................................................................  12
8.11  Counterparts............................................................................................  12
8.12  Waiver of Jury Trial....................................................................................  12
8.13  Consent to Jurisdiction.................................................................................  12
8.14  Expenses................................................................................................  12
8.15  Notices.................................................................................................  13
8.16  Further Assurances......................................................................................  13

ii

This MEMBERSHIP INTEREST PURCHASE AGREEMENT (the or this "Agreement")
dated as of December 6, 2004 is made and entered into by and among Arnos Corp.,
a Nevada corporation ("Arnos"), High River Limited Partnership, a Delaware
limited partnership ("High River"), Hopper Investments, LLC, a Delaware limited
liability company ("Hopper" and together with Arnos and High River, each a
"Seller" and collectively, the "Sellers"), and AREP Oil & Gas LLC, a Delaware
limited liability company ("Purchaser"). Capitalized terms not otherwise defined
herein have the meanings set forth in Article VII.

WHEREAS, Mid River LLC, a Delaware limited liability company (the
"Company") owns $38,000,000 principal amount of term loans outstanding (the
"Panaco Debt") representing 100% of the Commitment Percentage (as such term is
defined therein) under the Term Loan and Security Agreement together with all
related agreements (the "Credit Agreement"), dated as of November 16, 2004,
among Panaco, Inc. ("Panaco"). as Borrower, the Lenders (as defined therein),
and the Company, as Administrative Agent;

WHEREAS, the members of the Company are Arnos with a membership interest
of 98% ("Arnos LLC Interest") and each of High River and Hopper with membership
interests of 1% (the "High River LLC Interest" and "Hopper LLC Interest",
respectively, and collectively with the Arnos LLC Interest, the "Membership
Interests");

WHEREAS, Purchaser desires to purchase the Membership Interests from the
Company's members on the terms and subject to the conditions set forth in this
Agreement; and

WHEREAS, each of Arnos, High River and Hopper desire to sell its
respective portion of the Membership Interests to Purchaser on the terms and
subject to the conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

ARTICLE I
SALE OF MEMBERSHIP INTEREST AND CLOSING

1.1 Purchase and Sale. Each of the Sellers hereby agrees to sell to
Purchaser its portion of the Membership Interests, and Purchaser agrees to
purchase from each Seller such Seller's portion of the Membership Interests, at
the Closing on the terms and subject to the conditions set forth in this
Agreement.

1.2 Purchase Price. The aggregate purchase price for the Membership
Interests is $38,125,998.63 (the "Purchase Price").

1.3 Closing. Upon the terms and subject to the conditions of this
Agreement, the closing of the transactions contemplated hereby (the "Closing")
shall take place simultaneously with the execution and delivery of this
Agreement. The date on which the Closing occurs is herein referred to as the
"Closing Date."

1.4 Actions at the Closing. At the Closing: (i) Purchaser shall pay the
Purchase Price to Sellers in accordance with the amounts set forth on Schedule A
attached hereto, by electronic transfer of immediately available funds to the
respective accounts of each Seller in accordance with the instructions set forth
on Schedule A, and (ii) Purchaser and Sellers shall enter into an Assignment
Agreement in the form of Exhibit A attached hereto (the "Assignment Agreement")
pursuant to which Sellers shall assign all of the limited liability company
interests in the Company to Purchaser.

ARTICLE II
REPRESENTATIONS AND WARRANTIES REGARDING SELLERS

As an inducement to Purchaser to enter into this Agreement, Sellers,
jointly and severally, hereby make the following representations and warranties
to Purchaser:

2.1 Organization. Each Seller is duly organized, validly existing and in
good standing under the Laws of its state of organization. Each Seller has full
organizational power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby, including without limitation to sell and transfer (pursuant
to this Agreement) the Membership Interests.

2.2 Authority. The execution and delivery by each Seller of this
Agreement, and the performance by each Seller of its obligations hereunder, have
been duly and validly authorized by each Seller and no other action on the part
of each Seller, its shareholders, its managing member, its general partner, its
limited partners or its board (as applicable) is necessary for such execution,
delivery or performance. This Agreement has been duly and validly executed and
delivered by each Seller and constitutes a legal, valid and binding obligation
of each Seller, enforceable against each Seller in accordance with its terms.

2.3 Title. The delivery of the Assignment Agreement and other instruments
of transfer delivered by each Seller to Purchaser at the Closing will transfer
to Purchaser good and valid title to the Membership Interests, free and clear of
all Liens other than Liens created by Purchaser.

2.4 No Conflicts. The execution and delivery by each Seller of this
Agreement do not, and the performance by each Seller of its obligations under
this Agreement and the consummation of the transactions contemplated hereby will
not:

(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the organizational documents of any Seller;

(b) conflict with or result in a violation or breach of any term or
provision of any Law or Order applicable to any Seller or any of its Assets and
Properties; or 

(c) (i) conflict with or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require any Seller to obtain any consent, approval or action of, make any
filing with or give any notice to any Person as a result or under the terms of,
(iv) result in or give to any Person any right of termination, cancellation,

2

acceleration or modification in or with respect to, or (v) result in the
creation or imposition of any Lien upon any Seller or any of its Assets and
Properties under, any Contract or License to which any Seller is a party or by
which any of its Assets and Properties is bound.

2.5 Consents and Approvals. No consent, authorization or approval of,
filing or registration with, or cooperation from, any Governmental Authority or
any other Person not a party to this Agreement is necessary in connection with
the execution, delivery and performance by any Seller of this Agreement or the
consummation of the transactions contemplated hereby.

2.6 Brokers. Neither any Seller nor the Company has used any broker or
finder in connection with the transactions contemplated hereby, and neither
Purchaser nor any Affiliate of Purchaser has or shall have any liability or
otherwise suffer or incur any Loss as a result of or in connection with any
brokerage or finder's fee or other commission of any Person retained or
purporting to be retained by any Seller or by the Company in connection with any
of the transactions contemplated by this Agreement.

2.7 Accuracy of Statements. Neither this Agreement nor any schedule,
exhibit, statement, list, document, certificate or other information furnished
or to be furnished by or on behalf of the Company or any Seller to Purchaser or
any representative or Affiliate of Purchaser in connection with this Agreement
or any of the transactions contemplated hereby contains or will contain any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they are made, not misleading.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLERS

As an inducement to Purchaser to enter into this Agreement, Sellers
jointly and severally hereby make the following representations to Purchaser.

3.1 Due Organization of Company.

(a) The Company is duly organized and validly existing under the
laws of the state in which it is organized, with all requisite power and
authority to own, lease and operate its properties and to carry on its business
as it is now being owned, leased, operated and conducted. The Company is
licensed or qualified to do business and is in good standing (where the concept
of "good standing" is applicable) as a foreign corporation in each jurisdiction
where the nature of the properties owned, leased or operated by it and the
business transacted by it require such licensing or qualification.

(b) The Sellers have delivered to Purchaser true, correct and
complete copies of the organizational documents of the Company and the
Subsidiaries, which organizational documents are in full force and effect.

3.2 Capitalization. Sellers own 100% of the limited liability company
interests of the Company, free and clear of all Liens. No Person holds any
option, warrant, convertible security or other right to acquire any interest in
the Company. There are no obligations, contingent or

3

otherwise, of the Company to repurchase, redeem or otherwise acquire any
ownership interests of the Company or to provide funds to or make any material
investment (in the form of a loan, capital contribution or otherwise) in any
other Person.

3.3 Subsidiaries. The Company has no subsidiaries.

3.4 Consents and Approvals. No consent, authorization or approval of,
filing or registration with, or cooperation from, any Governmental Authority or
any other Person not a party to this Agreement is necessary in connection with
the execution, delivery and performance by each Seller of its respective
obligations under this Agreement or the consummation by each Seller of its
respective transactions contemplated hereby.

3.5 Financial Statements.

(a) The Sellers have delivered to Purchaser true, correct and
complete copies of the Financial Statements of Panaco. The Financial Statements
have been prepared in accordance with GAAP consistently applied and present
fairly the financial position, assets, liabilities and retained earnings of the
respective companies as of the dates thereof and the revenues, expenses, results
of operations, and cash flows of the respective companies for the periods
covered thereby. The Financial Statements are in accordance with the books and
records of the respective companies, do not reflect any transactions which are
not bona fide transactions and do not contain any untrue statement of a material
fact (whether or not required to be disclosed under GAAP) or omit to state any
material fact necessary to make the statements contained therein, in light of
the circumstances in which they were made, not misleading.

(b) The Sellers have delivered to Purchaser true and complete copies
of all Interim 2004 Financial Statements of Panaco. The Interim 2004 Financial
Statements present fairly the financial position, assets, liabilities and
retained earnings of the respective companies as of the dates thereof and the
revenues, expenses, results of operations, and cash flows of the respective
companies for the periods covered thereby. The Interim 2004 Financial Statements
are in accordance with the books and records of the respective companies, do not
reflect any transactions which are not bona fide transactions and do not contain
any untrue statement of a material fact (whether or not required to be disclosed
under GAAP) or omit to state any material fact necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.

3.6 Company Status. The Company was formed solely for the purpose of
engaging in the transactions of owning interests in Panaco. The Company has
engaged in no other business activities other than owning debt and equity issued
by Panaco. The Company has no liabilities, contracts, debts, claims, or
obligations whether accrued, absolute, contingent or otherwise, whether due or
to become due other than under the Credit Agreement. The Company has no Assets,
Properties or operations other than under the Credit Agreement and owning the
loans and serving as Agent thereunder.

3.7 No Adverse Effects or Changes. Since December 31, 2003, (i) neither
the Company nor any of the Subsidiaries has suffered any Material Adverse
Effect; (ii) there has been no change, event, development, damage or
circumstance affecting the Company or the Subsidiaries that, individually or in
the aggregate could reasonably be expected to have a Material Adverse Effect on
the Company or any of the Subsidiaries; (iii) there has not been any

4

change by the Company or any of the Subsidiaries in its accounting methods,
principles or practices, or any revaluation by the Company or any of the
Subsidiaries of any of its assets, including writing down the value of inventory
or writing off notes or accounts receivable; and (iv) the Company and each of
the Subsidiaries has conducted its business only in the ordinary course of
business consistent with past practice.

3.8 Credit Agreement. All of the representations and warranties of Panaco
set forth in the Credit Agreement are true and correct and Panaco is not in
breach of any term or provision of the Credit Agreement. There is no event of
default (as defined in the Credit Agreement).

3.9 Compliance with Law. The Company and the Subsidiaries are in
compliance and, at all times, have been in compliance in all respects with all
applicable Laws relating to the Company or the Subsidiaries or their respective
Assets and Properties or businesses. No investigation or review by any
governmental authority or self-regulatory authority is pending or, to the
knowledge of the Sellers, threatened, nor has any such authority indicated
orally or in writing to the Sellers, the Company or any of the Subsidiaries an
intention to conduct an investigation or review of the Company or any of the
Subsidiaries or, with respect to the Company or any of the Subsidiaries, of the
Sellers.

3.10 Security Interests As of the Closing, the Purchaser shall have a
legal, valid and enforceable, first priority perfected security interest in all
right, title and interest of Panaco in the "Collateral" described in the
Documents. All liens granted under the Credit Agreement are and will be as of
the Closing, for all purposes, valid, perfected, enforceable, non-avoidable and
effective as of the Closing without any further action by the Purchaser, the
Sellers, Panaco or any other party.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser hereby represents and warrants to Sellers as follows:

4.1 Organization of Purchaser. Purchaser is a limited liability company
duly formed, validly existing and in good standing under the Laws of the State
of Delaware. Purchaser has full organizational power and authority to execute
and deliver this Agreement and to perform Purchaser's obligations hereunder and
to consummate the transactions contemplated hereby, including without limitation
to buy pursuant to this Agreement the Membership Interest.

4.2 Authority. The execution and delivery by Purchaser of this Agreement,
and the performance by Purchaser of its obligations hereunder, have been duly
and validly authorized and, no other limited liability company action on the
part of Purchaser is necessary. This Agreement has been duly and validly
executed and delivered by Purchaser and constitutes a legal, valid and binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms.

5

4.3 No Conflicts. The execution and delivery by Purchaser of this
Agreement do not, the performance by Purchaser of its obligations under this
Agreement and the consummation of the transactions contemplated hereby, will
not:

(a) conflict with, or result in a violation or breach of, any of the
terms, conditions or provisions of the organizational documents of Purchaser;

(b) conflict with, or result in a violation or breach of, any term
or provision of any Law or Order applicable to Purchaser or any of its Assets
and Properties (other than such conflicts, violations or breaches which will not
have a Material Adverse Effect on Purchaser); or

(c) (i) conflict with, or result in a violation or breach of, (ii)
constitute (with or without notice or lapse of time or both) a default under,
(iii) require Purchaser to obtain any consent, approval or action of, make any
filing with or give any notice to any Person as a result or under the terms of,
(iv) result in or give to any Person any right of termination, cancellation,
acceleration or modification in or with respect to, or (v) result in the
creation or imposition of any Lien upon Purchaser or any of its Assets and
Properties under, any Contract or License to which Purchaser is a party or by
which any of its Assets and Properties is bound.

ARTICLE V
ASSIGNMENT AND ASSUMPTION

At the Closing, Sellers and Purchaser shall enter into the Assignment
Agreement pursuant to which Sellers will transfer, assign, convey and grant to
Purchaser, its successors and assigns forever 100% of Sellers' rights, title and
interest to the Membership Interests.

ARTICLE VI
INDEMNIFICATION

6.1 Indemnification by Sellers. Sellers agree jointly and severally to
indemnify Purchaser, its Affiliates and their respective officers, directors,
employees independent contractors, stockholders, principals, partners, agents,
or representatives (each an "Indemnified Person" and collectively, the
"Indemnified Persons") against, and to hold each Indemnified Person harmless
from, any and all Losses incurred or suffered by any Indemnified Person relating
to or arising out of or in connection with (a) any breach of or any inaccuracy
in any representation or warranty made by Sellers in this Agreement, or (b) any
breach of or failure by any Sellers to perform any of its covenants or
obligations set out or contemplated in this Agreement.

6.2 Claims. As promptly as is reasonably practicable after becoming aware
of a claim for indemnification under this Agreement, the Indemnified Person
shall promptly give notice to the indemnifying Seller or Sellers ("Indemnifying
Person") of such claim and the amount the Indemnified Person will be entitled to
receive hereunder from the Indemnifying Person; provided that the failure of the
Indemnified Person to promptly give notice shall not relieve the Indemnifying
Person of its obligations except to the extent (if any) that the Indemnifying
Person

6

shall have been prejudiced thereby. If the Indemnifying Person does not object
in writing to such indemnification claim within 30 days of receiving notice
thereof, the Indemnified Person shall be entitled to recover, on the
thirty-fifth day after such notice was given, from the Indemnifying Person the
amount of such claim, and no later objection by the Indemnifying Person shall be
permitted; if the Indemnifying Person agrees that it has an indemnification
obligation but objects that it is obligated to pay only a lesser amount, the
Indemnified Person shall nevertheless be entitled to recover, on the
thirty-fifth day after such notice was given, from the Indemnifying Person the
lesser amount, without prejudice to the Indemnified Person's claim for the
difference. In addition to the amounts recoverable by the Indemnified Person
from the Indemnifying Person pursuant to the foregoing provisions, the
Indemnified Person shall also be entitled to recover from the Indemnifying
Person interest on such amounts at the rate of Two Times Prime from, and
including, the thirty-fifth day after such notice of an indemnification claim is
given to, but not including, the date such recovery is actually made by the
Indemnified Person.

6.3 Notice of Third Party Claims; Assumption of Defense. The Indemnified
Person shall give notice as promptly as is reasonably practicable to the
Indemnifying Person of the assertion of any claim, or the commencement of any
suit, action or proceeding, by any Person not a party hereto (a "Third Party
Claim") in respect of which indemnity may be sought under this Agreement;
provided that the failure of the Indemnified Person to promptly give notice
shall not relieve the Indemnifying Person of its obligations except to the
extent (if any) that the Indemnifying Person shall have been prejudiced thereby.
The Indemnifying Person may, at its own expense, participate in the defense of
any Third Party Claim, suit, action or proceeding (a) upon notice to the
Indemnified Person and (b) upon delivery by the Indemnifying Person to the
Indemnified Person a written agreement that the Indemnified Person is entitled
to indemnification for all Losses arising out of such Third Party Claim, suit,
action or proceeding and that the Indemnifying Person shall be liable for the
entire amount of any Loss, at any time during the course of any such Third Party
Claim, suit, action or proceeding, assume the defense thereof; provided,
however, that (i) the Indemnifying Person's counsel is reasonably satisfactory
to the Indemnified Person, and (ii) the Indemnifying Person shall thereafter
consult with the Indemnified Person upon the Indemnified Person's reasonable
request for such consultation from time to time with respect to such Third Party
Claim, suit, action or proceeding. If the Indemnifying Person assumes such
defense, the Indemnified Person shall have the right (but not the duty) to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the Indemnifying Person. If, however, the
Indemnified Person reasonably determines in its judgment that representation by
the Indemnifying Person's counsel of both the Indemnifying Person and the
Indemnified Person would present such counsel with a conflict of interest, then
such Indemnified Person may employ separate counsel to represent or defend it in
any such Third Party Claim, action, suit or proceeding and the Indemnifying
Person shall pay all of the fees and disbursements in connection with the
retention of such separate counsel. If the Indemnifying Person fails to promptly
notify the Indemnified Party that the Indemnifying Party desires to defend the
Third Party Claim pursuant, or if the Indemnifying Person gives such notice but
fails to prosecute vigorously and diligently or settle the Third Party Claim,
then the Indemnified Party will have the right to defend, at the sole cost and
expense of the Indemnifying Person, the Third Party Claim by all appropriate
proceedings, which proceedings will be prosecuted by the Indemnifying Person in
good faith or will be settled at the discretion of the Indemnifying Person (with
the consent of the Indemnifying Person, which consent will not be unreasonably
withheld). The Indemnifying Person will have full control of

7

such defense and proceedings, including any compromise or settlement thereof.
Whether or not the Indemnifying Person chooses to defend or prosecute any such
Third Party Claim, suit, action or proceeding, all of the parties hereto shall
cooperate in the defense or prosecution thereof.

6.4 Settlement or Compromise. Any settlement or compromise made or caused
to be made by the Indemnified Person or the Indemnifying Person, of any claim,
suit, action or proceeding shall also be binding upon the Indemnifying Person or
the Indemnified Person, as the case may be, in the same manner as if a final
judgment or decree had been entered by a court of competent jurisdiction in the
amount of such settlement or compromise thereof; provided, however, that no
obligation, restriction or Loss shall be imposed on the Indemnified Person as a
result of such settlement without its prior written consent. The Indemnified
Person will give the Indemnifying Person at least 30 days' notice of any
proposed settlement or compromise of any Third Party Claim, suit, action or
proceeding it is defending, during which time the Indemnifying Person may reject
such proposed settlement or compromise; provided, however, that from and after
such rejection, the Indemnifying Person shall be obligated to assume the defense
of and full and complete liability and responsibility for such Third Party
Claim, suit, action or proceeding and any and all Losses in connection therewith
in excess of the amount of unindemnifiable Losses which the Indemnified Person
would have been obligated to pay under the proposed settlement or compromise.

6.5 Failure of Indemnifying Person to Act. In the event that the
Indemnifying Person does not assume the defense of any Third Party Claim, suit,
action or proceeding brought against an Indemnified Person, then any failure of
the Indemnified Person to defend or to participate in the defense of any such
Third Party Claim, suit, action or proceeding or to cause the same to be done,
shall not relieve the Indemnifying Person of any of its obligations under this
Agreement.

6.6 Tax Character. Sellers and Purchaser agree that any payments pursuant
to this Article VI will be treated for federal and state income tax purposes as
adjustments to the purchase price of the Membership Interest, and that they will
report such payments on all Tax Returns consistently with such characterization.

ARTICLE VII
DEFINITIONS

7.1 Defined Terms. As used in this Agreement, the following defined terms
have the meanings indicated below:

"Affiliate" means, with respect to any specified Person, any other Person
that, directly or indirectly, owns or controls, is under common ownership or
control with, or is owned or controlled by, such specified Person.

"Agreement" has the meaning ascribed to it in the recitals.

"Assets and Properties" of any Person means all assets and properties of
every kind, nature, character and description (whether real, personal or mixed,
whether tangible or intangible, and wherever situated), including the goodwill
related thereto, operated, owned or leased by such Person.

8

"Assignment Agreement" has the meaning ascribed to it in Section 1.4.

"Audited 2003 Financial Statements" means the audited financial statements
of Panaco as of December 31, 2003, consisting of the balance sheet at such date
and the related statements of operations, statement of members' equity, and cash
flows for the year then ended, each accompanied by the audit report of its
independent public auditors.

"Business Day" means any day of the year other than (i) any Saturday or
Sunday or (ii) any other day on which commercial banks located in New York City
are generally closed for business.

"Business or Condition" of any Person means the business, condition
(financial or otherwise), properties, assets or results of operations or
prospects of such Person, taken as a whole.

"Closing" has the meaning ascribed to it in Section 1.3.

"Closing Date" means the closing date of the transactions contemplated by
Section 1.3.

"Contract" means any contract, lease, commitment, understanding, sales
order, purchase order, agreement, indenture, mortgage, note, bond, right,
warrant, instrument, plan, permit or license, whether written or oral, which is
intended or purports to be binding and enforceable.

"Dollars" or numbers proceeded by the symbol "$" means amounts in United
States Dollars.

"Financial Statements" means the Audited 2003 Financial Statements and the
Interim 2004 Financial Statements.

"GAAP" means U.S. generally accepted accounting principles at the time in
effect.

"Governmental or Regulatory Authority" means any court, tribunal,
arbitrator, authority, administrative or other agency, commission, gaming
authority, licensing board official or other instrumentality of the United
States or any state, county, city or other political subdivision.

"Interim 2004 Financial Statements" means the unaudited internal financial
statements of Panaco for the nine months ended September 30, 2004, consisting of
the balance sheet at such date and the related statements of operations for the
period then ended.

"Knowledge" or "knowledge" means, with respect to the Sellers, the Company
and/or the Subsidiaries, in each case the knowledge of any director, officer,
senior executive, or member of any of Sellers.

"Laws" means all laws, statutes, rules, regulations, ordinances and other
pronouncements having the effect of law of the United States or any state,
county, city or other political subdivision or of any Governmental or Regulatory
Authority.

"License" means licenses, permits, certificates of authority,
authorizations, approvals, registrations, findings of suitability, variances,
exemptions, certificates of occupancy, orders, franchises and similar consents
granted or issued by any Governmental or Regulatory Authority.

9

"Lien" means any mortgage, lien (except for any lien for Taxes not yet due
and payable), charge, restriction, pledge, security interest, option, lease or
sublease, claim, right of any third party, easement, encroachment, encumbrance
or other adverse claim of any kind or description.

"Loss" or "Losses" means any and all liabilities, losses, costs, claims,
damages (including consequential damages), penalties and expenses (including
attorneys' fees and expenses and costs of investigation and litigation).

"Material Adverse Effect" or "Material Adverse Change," as to any Person,
means a material adverse change (or circumstance involving a prospective change)
in the Business or Condition of such Person.

"Membership Interests" has the meaning ascribed to it in the Recitals of
this Agreement.

"Order" means any writ, judgment, decree, injunction or similar order of
any Governmental or Regulatory Authority (in each such case whether preliminary
or final).

"Person" means any natural person, corporation, limited liability company,
general partnership, limited partnership, proprietorship, other business
organization, trust, union, association or Governmental or Regulatory Authority.

"Purchaser" has the meaning ascribed to it in the recitals of this
Agreement.

"Seller" has the meaning ascribed to it in the recitals of this
Agreement. 

"Sellers" has the meaning ascribed to it in the recitals of this
Agreement.

"Tax Return" means any report, return, document, declaration or other
information or filing required to be supplied to any taxing authority or
jurisdiction (foreign or domestic) with respect to Taxes, including attachments
thereto and amendments thereof, and including, without limitation, information
returns, any documents with respect to or accompanying payments of estimated
Taxes, or with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.

"Taxes" means any and all taxes, charges, fees, levies, duties,
liabilities, impositions or other assessments, including, without limitation,
income, gross receipts, profits, excise, real or personal property,
environmental, recapture, sales, use, value-added, withholding, social security,
retirement, employment, unemployment, occupation, service, license, net worth,
payroll, franchise, gains, stamp, transfer and recording taxes, fees and
charges, imposed by the Internal Revenue Service ("IRS") or any other taxing
authority (whether domestic or foreign including, without limitation, any state,
county, local or foreign government or any subdivision or taxing agency thereof
(including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest whether paid or received, fines, penalties or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies, duties, liabilities, impositions or other assessments.

"Tax" shall have a correlative meaning.

10

"Third Party Claim" has the meaning ascribed to it in Section 6.3.

"Two Times Prime" means two times the prime rate published by Citibank,
N.A.

ARTICLE VIII
MISCELLANEOUS

8.1 Investigation. It shall be no defense to an action for breach of this
Agreement that Purchaser or its agents have (or have not) made investigations
into the affairs of the Company or that the Company or Sellers could not have
known of the misrepresentation or breach of warranty.

8.2 Survival of Representations and Warranties. The representations and
warranties of the parties hereunder shall survive the Closing.

8.3 Entire Agreement. This Agreement, including the schedules and exhibits
hereto, which are incorporated herein and made an integrated part hereof,
constitutes the entire agreement between the parties hereto and supersedes any
and all prior discussions and agreements between the parties relating to the
subject matter hereof.

8.4 Waiver. Any term or condition of this Agreement may be waived at any
time by the party that is entitled to the benefit thereof, but no such waiver
shall be effective unless set forth in a written instrument duly executed by or
on behalf of the party waiving such term or condition. No waiver by any party of
any term or condition of this Agreement, in any one or more instances, shall be
deemed to be or construed as a waiver of the same or any other term or condition
of this Agreement on any future occasion. All remedies, either under this
Agreement or by Law or otherwise afforded, will be cumulative and not
alternative.

8.5 Amendment. This Agreement may be amended, supplemented or modified
only by a written instrument duly executed by or on behalf of each party hereto.

8.6 No Third Party Beneficiary. The terms and provisions of this Agreement
are intended solely for the benefit of each party hereto and their respective
successors or permitted assigns, and it is not the intention of the parties to
confer third party beneficiary rights upon any other Person, except that (a)
each Indemnified Persons shall be a third party beneficiary of Article VI, and
(b) AREP shall be a third party beneficiary of Section 8.14.

8.7 Assignment; Binding Effect. No party may assign this Agreement or any
right, interest or obligation hereunder without the prior written consent of the
other Parties. This Agreement is binding upon, inures to the benefit of and is
enforceable by the parties hereto and their respective successors and assigns.

8.8 Headings. The headings used in this Agreement have been inserted for
convenience of reference only and do not define or limit the provisions hereof.

8.9 Invalid Provisions. If any provision of this Agreement is held to be
illegal, invalid or unenforceable under any present or future Law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such 

11

provision will be fully severable, (b) this Agreement will be construed and
enforced as if such illegal, invalid or unenforceable provision had never
comprised a part hereof, and (c) the remaining provisions of this Agreement will
remain in full force and effect and will not be affected by the illegal, invalid
or unenforceable provision or by its severance here from.

8.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to the
conflicts of laws principles thereof.

8.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.

8.12 Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES TRIAL BY JURY
IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY OF THEM AGAINST ANY
OTHER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT, OR ANY OTHER
AGREEMENTS EXECUTED IN CONNECTION HEREWITH OR THE ADMINISTRATION THEREOF OR ANY
OF THE TRANSACTIONS CONTEMPLATED HEREIN OR THEREIN. No party to this Agreement
shall seek a jury trial in any lawsuit, proceeding, counterclaim, or any other
litigation procedure based upon, or arising out of, this Agreement or any
related instruments or the relationship between the parties. No party will seek
to consolidate any such action in which a jury trial has been waived with any
other action in which a jury trial cannot be or has not been waived. THE
PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND
THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY
AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS
SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.

8.13 Consent to Jurisdiction. Each party irrevocably submits to the
exclusive jurisdiction of any NY State Court in the County of New York or any
courts of the United States of America located in the Southern District of New
York, and each party hereby agrees that all suits, actions and proceedings
brought by such party hereunder shall be brought in any such court. Each party
irrevocably waives, to the fullest extent permitted by law, any objection which
it may now or hereafter have to the laying of the venue of any such suit, action
or proceeding brought in any such court, any claim that any such suit, action or
proceeding brought in such a court has been brought in an inconvenient forum and
the right to object, with respect to any such suit, action or proceeding brought
in any such court, that such court does not have jurisdiction over such party or
the other party. In any such suit, action or proceeding, each party waives, to
the fullest extent it may effectively do so, personal service of any summons,
complaint or other process and agrees that the service thereof may be made by
any means permitted by Section 8.15 (other than facsimile transmission). Each
party agrees that a final non-appealable judgment in any such suit, action or
proceeding brought in such a court shall be conclusive and binding.

8.14 Expenses. All expenses, costs and fees in connection with the
transactions contemplated hereby (including fees and disbursements of counsel,
consultants and accountants) incurred by (a) Sellers shall be paid and borne
exclusively by Sellers, and (b) Purchaser shall be paid and borne exclusively by
Purchaser.

12

8.15 Notices. All notices, request, demands and other communications
hereunder shall be in writing and shall be delivered personally, by certified or
registered mail, return receipt requested, and postage prepaid, by courier, or
by facsimile transmission, addressed as follows:

If to Sellers:

c/o Icahn Associates Corp.
767 Fifth Avenue, 47th floor
New York NY 10153

If to Purchaser:

c/o American Real Estate Partners, L.P.
100 South Bedford Rd.
Mt. Kisco, NY 10549

With a copy to:

Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
Attention: William D. Regner

or to such other address as a party may from time to time designate in writing
in accordance with this Section. Each notice or other communication given to any
party hereto in accordance with the provisions of this Agreement shall be deemed
to have been received (a) on the Business Day it is sent, if sent by personal
delivery, (b) the earlier of receipt of three Business Days after having been
sent by certified or registered mail, return receipt requested and postage
prepaid, (c) on the Business Day it is sent, if sent by facsimile transmission
and an activity report showing the correct facsimile number of the party on whom
notice is served and the correct number of pages transmitted is obtained by the
sender (provided, however, that such notice or other communication is also sent
by some other means permitted by this Section 0, or (d) on the first Business
Day after sending, if sent by courier or overnight delivery.

8.16 Further Assurances. Sellers covenant and agree that, from time to
time subsequent to Closing, any Seller will, at the request of Purchaser,
execute and deliver all such documents, including, without limitation, all such
additional conveyances, transfers, consents and other assurances and do all such
other acts and things as Purchaser may from time to time request be executed or
done in order to better evidence, perfect or effect any provision of this
Agreement, or of any agreement or other document executed pursuant to this
Agreement, or any of the respective obligations intended to be created hereby or
thereby.

[SIGNATURE PAGE FOLLOWS]

13

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.

SELLERS:

ARNOS CORP.

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Vice President

HIGH RIVER LIMITED PARTNERSHIP

By: Hopper Investments LLC, general partner

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

HOPPER INVESTMENTS LLC

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

PURCHASER:

AREP OIL & GAS LLC

By: American Real Estate Holdings Limited
Partnership, its member

By: American Property Investors, Inc.,
its general partner

By:  /s/ John P. Saldarelli
------------------------
Name:  John P. Saldarelli
Title: Chief Financial Officer

[Signature Page to the Membership Interest Purchase Agreement]

14

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officer of each party hereto as of the date first above
written.

SELLERS:

ARNOS CORP.

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Vice President

HIGH RIVER LIMITED PARTNERSHIP

By: Hopper Investments LLC, general partner

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

HOPPER INVESTMENTS LLC

By: /s/ Edward E. Mattner
-------------------------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

PURCHASER:

AREP OIL & GAS LLC

By: American Real Estate Holdings Limited
Partnership, its member

By: American Property Investors, Inc.,
its general partner

By: /s/ John P. Saldarelli
----------------------
Name:  John P. Saldarelli
Title: Chief Financial Officer

[Signature Page to the Membership Interest Purchase Agreement]

14

Exhibit A

Assignment and Assumption Agreement

Assignment and Assumption Agreement, dated as of
December_____________, 2004, is made and entered into by and among
Arnos Corp., a Nevada corporation ("Arnos"), High River Limited Partnership, a
Delaware limited partnership ("High River"), Hopper Investments, LLC, a Delaware
limited liability company ("Hopper" and together with Arnos and High River, each
a "Seller" and collectively, the "Sellers"), and AREP Oil & Gas LLC, a Delaware
limited liability company ("Purchaser"). Capitalized terms used herein shall
have the meanings attributed to them in the Membership Interest Purchase
Agreement, dated as of even date herewith, between Purchaser and Sellers (the
"Membership Interest Purchase Agreement").

In consideration of the purchase and sale of the membership interests in
accordance with the Membership Purchase Agreement, Purchaser and Sellers agree
as follows:

1. Sellers hereby transfer and convey of all of their right, title and
interest in and to the Operating Agreement of Mid River LLC (the "LLC") to
Purchaser.

2 Purchaser hereby accepts all of Sellers' right, title and interest in
and to the LLC, and agrees to be bound by all the terms and provisions of the
Third Amended and Restated Operating Agreement of the LLC.

3. As a result of the foregoing, Purchaser is the sole owner and member of
the LLC.

4. The LLC hereby acknowledges the admission of Purchaser as a member of
the LLC.

IN WITNESS WHEREOF, the parties have executed this document on
__________________________, 2004.

SELLERS:

ARNOS CORP.

By: /s/ Edward E. Mattner
-------------------------
Name:  Edward E. Mattner
Title: Vice President

16

HIGH RIVER LIMITED PARTNERSHIP

By: Hopper Investments LLC, general 
partner

By: /s/ Edward E. Mattner
-------------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

HOPPER INVESTMENTS LLC

By: /s/ Edward E. Mattner
-------------------------
Name:  Edward E. Mattner
Title: Authorised Signatory

PURCHASER:

AREP OIL & GAS LLC

By: American Real Estate Holdings
Limited Partnership, its member

By: American Property Investors,
Inc., its general partner

By: /s/ John P. Saldarelli
----------------------
Name:  John P. Saldarelli
Title: Chief Financial Officer

17

ACKNOWLEDGED AND AGREED TO (for purposes of Section 4):

Mid River LLC

By: Edward E. Mattner
-----------------------
Name:  Edward E. Mattner
Title: Authorized Signatory

[signature page to Assignment with respect to Mid River sale to AREP Oil & Gas]

18

EXHIBIT 99.4

Assignment and Assumption Agreement

Assignment and Assumption Agreement, dated as of December 6, 2004,
is made and entered into by and among Arnos Corp., a Nevada corporation
("Arnos"), High River Limited Partnership, a Delaware limited partnership ("High
River"), Hopper Investments, LLC, a Delaware limited liability company ("Hopper"
and together with Arnos and High River, each a "Seller" and collectively, the
"Sellers"), and AREP Oil & Gas LLC, a Delaware limited liability company
("Purchaser"). Capitalized terms used herein shall have the meanings attributed
to them in the Membership Interest Purchase Agreement, dated as of even date
herewith, between Purchaser and Sellers (the "Membership Interest Purchase
Agreement").

In consideration of the purchase and sale of the membership interests in
accordance with the Membership Purchase Agreement, Purchaser and Sellers agree
as follows:

1. Sellers hereby transfer and convey of all of their right, title and
interest in and to the Operating Agreement of Mid River LLC (the "LLC") to
Purchaser.

2 Purchaser hereby accepts all of Sellers' right, title and interest in
and to the LLC, and agrees to be bound by all the terms and provisions of the
Third Amended and Restated Operating Agreement of the LLC.

3. As a result of the foregoing, Purchaser is the sole owner and member of
the LLC.

4. The LLC hereby acknowledges the admission of Purchaser as a member of
the LLC.

IN WITNESS WHEREOF, the parties have executed this document on December 6,
2004.

SELLERS:

ARNOS CORP.

By: /s/ Edward E. Mattner
---------------------------------
Name: Edward E. Mattner
Title: Vice President

HIGH RIVER LIMITED PARTNERSHIP

By: Hopper Investments LLC, general
partner

By: /s/ Edward E. Mattner
-----------------------------------
Name: Edward E. Mattner
Title: Authorized Signatory

HOPPER INVESTMENTS LLC

By: /s/ Edward E. Mattner
-----------------------------------
Name: Edward E. Mattner
Title: Authorized Signatory

PURCHASER:

AREP OIL & GAS LLC

By: American Real Estate Holdings
Limited Partnership, its member

By: American Property Investors,
Inc., its general partner

By: /s/ John P. Saldarelli
------------------------------
Name: John P. Saldarelli
Title: Chief Financial Officer

2

ACKNOWLEDGED AND AGREED TO (for purposes of Section 4):

Mid River LLC

By: /s/ Edward E. Mattner
-------------------------------
Name: Edward E. Mattner
Title: Authorized Signatory

[signature page to Assignment with respect to Mid River sale to AREP Oil & Gas]

3

EXHIBIT 99.5

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

AMENDED AND RESTATED OIL & GAS
TERM LOAN AGREEMENT
BY AND AMONG

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

THORNWOOD ASSOCIATES LP
(LENDER)

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

AND

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

TRANSTEXAS GAS CORPORATION
(BORROWER)

AND

GALVESTON BAY PIPELINE COMPANY

AND

GALVESTON BAY PROCESSING CORPORATION
(GUARANTORS)

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

AS OF AUGUST 28, 2003

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

TABLE OF CONTENTS

PAGE
----

I.       DEFINITIONS..................................................................................       1
1.1.  General Terms................................................................................       1
1.2.  Uniform Commercial Code Terms................................................................      23
1.3.  Certain Matters of Construction..............................................................      23

II.      PAYMENTS.....................................................................................      24
2.1.  Term Loan....................................................................................      24
2.2.  Repayment of Principal.......................................................................      24
2.3.  Acceleration; Note...........................................................................      24
2.4.  Manner of Payment............................................................................      24

III.     INTEREST AND FEES............................................................................      24
3.1.  Interest.....................................................................................      24
3.2.  Computation of Interest......................................................................      24
3.3.  Maximum Charges..............................................................................      25

IV.      REPRESENTATIONS AND WARRANTIES...............................................................      25
4.1.  Authority....................................................................................      25
4.2.  Formation and Qualification..................................................................      25
4.3.  Corporate Name...............................................................................      25
4.4.  Security Interests...........................................................................      25
4.5.  Plan of Reorganization.......................................................................      26
4.6.  Location of Borrower.........................................................................      26
4.7.  Representations, Warranties and Covenants Concerning the Mortgages...........................      26

V.       AFFIRMATIVE COVENANTS........................................................................      26
5.1.  Payment of Obligations.......................................................................      26
5.2.  Corporate Existence..........................................................................      26
5.3.  Payment of Taxes and Other Claims............................................................      26
5.4.  Maintenance of Properties and Insurance......................................................      26
5.5.  Compliance with Laws; Violations.............................................................      28
5.6.  Execution of Supplemental Instruments........................................................      28
5.7.  Payment of Debt..............................................................................      28
5.8.  Environmental Matters........................................................................      28
5.9.  Inspections..................................................................................      29

VI.      NEGATIVE

COVENANTS...........................................................................      29
6.1.  Mergers, Consolidations and Other Fundamental Changes........................................      29
6.2.  Asset Sales..................................................................................      31
6.3.  Limitation on Incurrence of Additional Debt..................................................      32
6.4.  Creation of Liens............................................................................      35
6.5.  Limitation on Investments, Loans and Advances................................................      35
6.6.  Limitation on Restricted Payments............................................................      35
6.7.  Nature of Business...........................................................................      35

6.8.  Subsidiaries.................................................................................      35
6.9.  Fiscal Year and Accounting Changes...........................................................      35
6.10.    Amendment of Articles of Incorporation, By-Laws...........................................      36
6.11.    Changes Relating to Subordinated Debt.....................................................      36

VII.     FINANCIAL COVENANTS..........................................................................      36
7.1.  PV10 Valuation...............................................................................      36

VIII.    EVENTS OF DEFAULT............................................................................      36
8.1.  Payment of Principal or Interest.............................................................      36
8.2.  Misleading Representation or Warranty........................................................      36
8.3.  Observing Article VII Covenants..............................................................      37
8.4.  Attachment Against Property..................................................................      37
8.5.  Observing Agreement Covenants................................................................      37
8.6.  Judgments....................................................................................      37
8.7.  Insolvency of Borrower.......................................................................      37
8.8.  Inability to Pay Debts.......................................................................      37
8.9.  Insolvency of Subsidiary or Guarantor........................................................      37
8.10.    Change in Borrower's Condition............................................................      38
8.11.    Liens.....................................................................................      38
8.12.    Default under Ancillary Document..........................................................      38
8.13.    Payment Default...........................................................................      38
8.14.    Material Adverse Effect...................................................................      38
8.15.    Material Provision........................................................................      38
8.16.    Modification to Intellectual Property or Agreements.......................................      38
8.17.    Collateral Seizure........................................................................      38
8.18.    Guarantor Default.........................................................................      39
8.19.    NYMEX Gas Closing Price...................................................................      39

IX.      LENDER'S RIGHTS AND REMEDIES AFTER DEFAULT...................................................      39
9.1.  Rights and Remedies..........................................................................      39
9.2.  Lender's Discretion..........................................................................      40
9.3.  Setoff.......................................................................................      40
9.4.  Rights and Remedies not Exclusive............................................................      40
9.5.  Allocation of Payments After Event of Default................................................      40

X.       WAIVERS AND JUDICIAL PROCEEDINGS.............................................................      40
10.1.    Waiver of Notice..........................................................................      40
10.2.    Delay.....................................................................................      41
10.3.    Jury Waiver...............................................................................      41

XI.      EFFECTIVE DATE AND TERMINATION...............................................................      41
11.1.    Term......................................................................................      41
11.2.    Termination...............................................................................      41

XII.     RELEASE OF COLLATERAL........................................................................      42
12.1.    Disposition of Certain Collateral Without Requesting Release..............................      42
12.2.    Requesting Release of Collateral..........................................................      42

XIII.    GUARANTY.....................................................................................      43
13.1.    Guaranty..................................................................................      43
13.2.    No Impairment.............................................................................      43
13.3.    Guaranty Absolute.........................................................................      43
13.4.    Waivers...................................................................................      44
13.5.    Payments from Guarantor...................................................................      45
13.6.    No Termination............................................................................      45
13.7.    Recapture.................................................................................      45
13.8.    Guaranties of Borrower and Material Subsidiaries..........................................      45

XIV.     MISCELLANEOUS................................................................................      45
14.1.    GOVERNING LAW.............................................................................      45
14.2.    Entire Understanding......................................................................      46
14.3.    Successors and Assigns;  New Lender.......................................................      47
14.4.    Application of Payments...................................................................      47
14.5.    Indemnity.................................................................................      47
14.6.    Notice....................................................................................      47
14.7.    Survival..................................................................................      48
14.8.    Severability..............................................................................      48
14.9.    Expenses..................................................................................      48
14.10.   Injunctive Relief.........................................................................      48
14.11.   Consequential Damages.....................................................................      49
14.12.   Captions..................................................................................      49
14.13.   Counterparts; Faxed Signatures............................................................      49
14.14.   Construction..............................................................................      49
14.15.   Confidentiality...........................................................................      49

EXHIBITS

2.3   Form of Amended and Restated O&G Note

4.7   Additional Representations and Covenants

AMENDED AND RESTATED OIL & GAS LOAN AGREEMENT
("RESTRUCTURED O&G AGREEMENT")

TRANSTEXAS GAS CORPORATION, a corporation organized under the
laws of the State of Delaware ("Borrower"), GALVESTON BAY PIPELINE COMPANY, a
subsidiary of Borrower ("GB Pipeline), GALVESTON BAY PROCESSING CORPORATION, a
subsidiary of Borrower "GB Processing" and together with GB Pipeline and any
other subsidiary of Borrower, which shall become a party hereto, the
"Guarantors") and THORNWOOD ASSOCIATES LP ("Lender") are hereby restating and
amending the Oil and Gas Revolving Credit and Term Loan Agreement with certain
"Lenders" (as defined therein) and GMAC Commercial Credit LLC , a limited
liability company organized under the laws of the State of New York, as agent
for the Lenders, dated as of March 15, 2000 the "Original Agreement" and as
restated and amended on this 28 day of August, 2003, the "Restructured O&G
Agreement" or the "Agreement").

This Agreement shall become valid and enforceable only when, and if,
Creditor's Joint Plan of Reorganization for Debtors Under Chapter 11 of the
Bankruptcy Code Submitted by Thornwood Associates LP, dated as of June 27, 2003,
as modified July 8, 2003 and as may be modified thereafter ("Thornwood's Plan"
or the "Plan"), confirmed by Order of the Bankruptcy Court, dated August 28,
2003, becomes effective.

Pursuant to the Plan, as of the date hereof, each holder of an Allowed
Prepetition O&G Claim, in full satisfaction, settlement, release and discharge
of, and exchange for, such Claim received (i) Cash in a sum equal to its pro
rata share of the Allowed O&G Claim less $32.5 million and (ii) its pro rata
share of the Restructured O&G Note in principal amount of $32.5 million, and
Thornwood paid to the Prepetition O&G Lenders pro rata the Cash set forth in
paragraph (i) hereto and an amount equal to the principal amount of the
Restructured O&G Note. Subject to such payment and pursuant to the terms of the
Plan, the Reorganized Debtors are issuing the Restructured O&G Note directly to
Thornwood, and are entering into this Restructured O&G Agreement and the
Restructured O&G Security Agreement directly with Thornwood.

NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, Borrower and Lender hereby agree as follows:

I. DEFINITIONS. Any term not defined in this Agreement shall have the meaning
ascribed to it in the Plan. The following additional terms shall mean as
follows:

1.1. GENERAL TERMS For purposes of this Agreement the
following terms shall have the following meanings:

"Accounts" means "accounts," as that term is defined in
Article 9 of the Uniform Commercial Code as in effect in the State of New York,
together with the proceeds and products thereof.

"Adjusted Consolidated Tangible Assets" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net cash flows from proved oil and gas reserves of Borrower and its
Subsidiaries, (before any state or federal income tax), as estimated in a Proved
Reserve Report as of a date no earlier than Borrower's most recent fiscal year
end

(or, if such Proved Reserve Report is unavailable, or if the date of
determination is after the end of the first fiscal quarter of the most recent
fiscal year of Borrower, as estimated by Borrower's engineers on the same basis
as of a date no earlier than the end of the most recent fiscal quarter, which
estimates shall be confirmed in writing by a report by nationally recognized
independent petroleum engineers in the event of a Material Change), (ii) the Net
Working Capital of Borrower on a date no earlier than the date of Borrower's
latest consolidated annual or quarterly financial statements, and (iii) with
respect to all other tangible assets (which are deemed to include mineral
lease-hold interests) of Borrower and its Subsidiaries, the net book value of
such other tangible assets on a date no earlier than the date of Borrower's
latest consolidated annual or quarterly financial statements, minus (b) minority
interests and, to the extent not otherwise taken into account in determining
Adjusted Consolidated Tangible Assets, any gas balancing liabilities of Borrower
and its Subsidiaries. In addition to, but without duplication of the foregoing,
for purposes of this definition, "Adjusted Consolidated Tangible Assets" shall
be calculated after giving effect, on a pro forma basis, to (1) any Permitted
Investment, on or before the date of the transaction giving rise to the need to
calculate Adjusted Consolidated Tangible Assets (the "Assets Transaction Date"),
in any other Person that, as a result of such investment, becomes a Subsidiary
of Borrower, (2) the acquisition, on or before the Assets Transaction Date (by
merger, consolidation, or purchase of stock or assets), of any business or
assets, including, without limitation, Permitted Investments, and (3) any sales
or other dispositions of assets (other than sales of Inventory Hydrocarbons or
other mineral products in the ordinary course of business) occurring on or prior
to the Assets Transaction Date. For purposes of calculating the ratio of
Borrower's Adjusted Consolidated Tangible Assets to total consolidated Debt of
Borrower and its Subsidiaries, Debt of a Subsidiary that is not a wholly-owned
Subsidiary of Borrower (which Debt is non-recourse to Borrower or any of its
other Subsidiaries or any of their assets) shall be included only to the extent
of Borrower's pro rata ownership interest in such Subsidiary.

"Adjusted Net Assets" of a Guarantor means the lesser of (a)
the amount by which the Guarantor's property, at a fair valuation, exceeds the
sum of its debts (including unliquidated or contingent debts), (b) the amount by
which the present fair salable value of the Guarantor's assets exceeds the
amount that will be required to pay its probable liability on its existing debts
as they become absolute and matured, (c) the amount by which the Guarantor's
assets exceed the maximum amount that would constitute unreasonably small
capital for its business, or (d) the amount by which the Guarantor's assets
exceed the amount that such Guarantor should reasonably retain to pay its debts
(including unliquidated or contingent debts) as they mature.

"Affiliate" means, with respect to any specified Person, (a)
any other Person directly or indirectly controlling or controlled by, or under
direct or indirect common control with, such specified Person, or (b) any
director or controlling shareholder of such other Person or (c) any officer of
such specified Person or such other Person. For purposes of this definition, the
term "control" means (i) the power to direct the management and policies of a
Person, directly or through one or more intermediaries, whether through the
ownership of voting securities, by contract, or otherwise, or (ii) without
limiting the foregoing, the beneficial ownership of 10% or more of the voting
power of the voting common equity of such Person (on a fully diluted basis) or
of warrants or other rights to acquire such equity (regardless of whether
presently exercisable).

- 2 -

"Ancillary Documents" means the Security Documents, the Note
and any and all other agreements, instruments and documents, including, without
limitation, guaranties, pledges, powers of attorney, consents, and all other
writings heretofore, now or hereafter executed by Borrower or any Subsidiary and
delivered to Lender in respect of the transactions contemplated by this
Agreement.

"Asset Sale" means any direct or indirect conveyance, sale,
transfer or other disposition, in one transaction or a series of related
transactions, of any of the properties, businesses or assets of Borrower or any
Subsidiary of Borrower, whether owned on the Effective Date or thereafter
acquired; provided, however, that "Asset Sale" shall not include (a) any
disposition of Inventory in the ordinary course of business, (b) any pledge or
disposition of assets (if such pledge or disposition would otherwise constitute
an Asset Sale) to the extent and only to the extent that it results in the
creation of a Permitted Lien (other than the creation of a Permitted Lien in
connection with a Drilling Production Payment or a Drilling Program, which in
either case shall be treated as an Asset Sale hereunder), or (c) any issuance or
disposition of securities that is made pursuant to and in accordance with the
Plan or a Plan Order.

"Attributable Debt" in respect of a Sale and Leaseback
Transaction means, at the time of determination, the present value (discounted
at the rate of interest implicit in such transaction, determined in accordance
with GAAP, or, in the event that such rate of interest is not reasonably
determinable, discounted at the rate of interest of 15%) of the obligation of
the lessee for net rental payments during the remaining term of the lease
included in such Sale and Leaseback Transaction (including any period for which
such lease has been extended or may, at the option of the lessor, be extended).

"Board of Directors" means, with respect to any Person, the
board of directors of such Person or any committee of the board of directors of
such Person authorized, with respect to any particular matter, to exercise the
power of the board of directors of such Person.

"Board Resolution" means, with respect to any Person, a duly
adopted resolution of the Board of Directors of such Person.

"Borrower" means TransTexas Gas Corporation, a Delaware
corporation, and all permitted successors and assigns.

"Borrower Entities" means Borrower and each of its
Subsidiaries.

"Business Day" means any day other than a day on which
commercial banks in New York are authorized or required by law to close.

"Capital Expenditures" of a Person means expenditures (whether
paid in cash or accrued as a liability) by such Person or any of its
Subsidiaries that, in conformity with GAAP, are or would be included in "capital
expenditures," "additions to property, plant, or equipment" or comparable items
in the consolidated financial statements of such Person consistent with prior
accounting practices.

- 3 -

"Capital Lease" as applied to any Person, means any lease of
any property (whether real, personal, or mixed) by that Person as lessee which,
in conformity with GAAP, is accounted for as a capital lease on the balance
sheet of that Person.

"Capital Stock" means, with respect to any Person, any capital
stock of such Person and shares, interests, or other ownership interests
(however designated) of such Person and any rights (other than debt securities
convertible into corporate stock), warrants or options to purchase any of the
foregoing, including without limitation, each class of common stock and
preferred stock of such Person, if such Person is a corporation, and each
general or limited partnership interest or other equity interest of such Person,
if such Person is a partnership.

"Capitalized Lease Obligation" means obligations under a lease
that are required to be capitalized for financial reporting purposes in
accordance with GAAP, and the amount of Debt represented by such obligations
shall be the capitalized amount of such obligations, as determined in accordance
with GAAP.

"Cash Equivalents" means (a) Dollars, (b) securities issued or
directly and fully guaranteed or insured by the United States government or any
agency or instrumentality thereof having maturities of not more than one year
from the date of acquisition, (c) certificates of deposit with maturities of one
year or less from the date of acquisition, bankers' acceptances with maturities
not exceeding one year, and overnight bank deposits, in each case, with any
Eligible Institution, (d) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clauses (b) and
(c) entered into with any Eligible Institution, (e) commercial paper rated
"P-1," "A-1" or the equivalent thereof by Moody's Investors Service, Inc. or
Standard & Poor's Ratings Group, respectively, and in each case maturing within
one year after the date of acquisition, (f) shares of money market funds that
invest solely in Dollars and securities of the types described in clauses (a)
through (e) above, (g) demand and time deposits and certificates of deposit with
any commercial bank organized in the United States not meeting the
qualifications specified in clause (c) above or an Eligible Institution,
provided, however, that such deposits and certificates support bonds, letters of
credit and other similar types of obligations incurred are in the ordinary
course of business, (h) deposits, including deposits denominated in foreign
currency, with any Eligible Institution; provided, however, that all such
deposits do not exceed $10 million in the aggregate at any one time, and (i)
demand or fully insured time deposits used in the ordinary course of business
with commercial banks insured by the Federal Deposit Insurance Corporation.

"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sections 9601 et
seq.

"Charges" shall mean all taxes, charges, fees, imposts, levies
or other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation
and property taxes, custom duties, fees, assessments, liens, claims and charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts, imposed by any taxing or other authority, domestic
or foreign (including, without limitation, the Pension Benefit Guaranty
Corporation or any environmental agency or superfund), upon the Collateral,
Borrower or any of its Affiliates.

- 4 -

"Collateral" means and includes all property and interests in
property of Borrower and its Subsidiaries, now owned or hereafter acquired, upon
which a Lien is created in favor of Lender, for its benefit in accordance with
the Security Documents, including, without limitation, the Security Agreement.

"Confirmation Order" means the order pursuant to Section 1129
of the Bankruptcy Code confirming the Plan entered by the Bankruptcy Court in
the Borrower's case on August 5, 2003.

"Consents" means all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of any
Governmental Body and other third parties, domestic or foreign, necessary to
carry on Borrower's business, including, without limitation, any Consents
required under all applicable federal, state or other applicable law.

"Consolidated Coverage Ratio" means for any period, the ratio
of (a) the sum of Consolidated EBITDA of Borrower for such period, plus the net
proceeds received by Borrower and its consolidated Subsidiaries in respect of
Indebtedness for borrowed money (other than Indebtedness under this Agreement)
incurred during such period, plus, without duplication, the net proceeds
received by Borrower and its consolidated Subsidiaries from asset sales (other
than sales of Inventory and Hydrocarbons in the ordinary course of business)
consummated during such period, to (b) the sum of Consolidated Interest Expense
of Borrower for such period, plus Capital Expenditures of Borrower during such
period, plus required principal payments by Borrower and its consolidated
Subsidiaries on Indebtedness for borrowed money (other than Indebtedness under
this Agreement) during such period, plus cash dividends.

"Consolidated EBITDA" of any Person for any period, unless
otherwise defined herein, means (a) the Consolidated Net Income of such Person
for such period, plus (b) the sum, without duplication (and only to the extent
such amounts are deducted from net revenues in determining such Consolidated Net
Income), of (a) the provision for income taxes for such period, for such Person
and its consolidated Subsidiaries, (b) depreciation, depletion, and amortization
of such Person and its consolidated Subsidiaries for such period, and (c)
Consolidated Fixed Charges of such Person for such period, determined in each
case, on a consolidated basis for such Person and its consolidated Subsidiaries
in accordance with GAAP.

"Consolidated Fixed Charge Coverage Ratio" on any date (the
"Transaction Date") means, with respect to any Person, the ratio, on a pro forma
basis, of (a) the aggregate amount of Consolidated EBITDA of such Person
(attributable to continuing operations and businesses and exclusive of the
amounts attributable to operations and businesses discontinued or disposed of,
on a pro forma basis as if such operations and businesses were discontinued or
disposed of on the first day of the Reference Period) for the Reference Period
to (b) the aggregate Consolidated Fixed Charges of such Person (exclusive of
amounts attributable to discontinued operations and businesses on a pro forma
basis as if such operations and businesses were discontinued or disposed of on
the first day of the Reference Period, but only to the extent that the
obligations giving rise to such Consolidated Fixed Charges would no longer be
obligations contributing to such Person's Consolidated Fixed Charges subsequent
to the Transaction Date) during the Reference Period; provided, however, that
for purposes of such computation, in calculating Consolidated EBITDA and
Consolidated Fixed Charges, (i) the transaction giving rise to the need to
calculate the Consolidated Fixed Charge Coverage Ratio

- 5 -

shall be assumed to have occurred on the first day of the Reference Period (ii)
the incurrence of any Debt or issuance of Disqualified Capital Stock during the
Reference Period or subsequent thereto and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of such Reference Period,
(iii) Consolidated Interest Expense attributable to any Debt (whether existing
or being incurred) bearing a floating interest rate shall be computed as if the
rate in effect on the Transaction Date had been the applicable rate for the
entire period, unless such Person or any of its Subsidiaries is a party to a
Swap Obligation (that remains in effect for the 12-month period after the
Transaction Date) that has the effect of fixing the interest rate on the date of
computation, in which case such rate (whether higher or lower) shall be used,
and (iv) if Borrower or any Subsidiary of Borrower has repaid, repurchased,
defeased or otherwise discharged any Debt or Disqualified Capital Stock since
the beginning of the period measured by the four full fiscal quarters ended
immediately before the Transaction Date or if any Debt is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than Debt
incurred under any revolving credit facility unless such Debt has been
permanently repaid and has not been replaced) on the Transaction Date, EBITDA
and Consolidated Fixed Charges for such period shall be calculated on a pro
forma basis as if such discharge had occurred on the first day of such period
and as if Borrower or such Subsidiary has not earned the interest income which
has actually accrued during such period in respect of cash or Cash Equivalents
used to repay, repurchase, defease or otherwise discharge such Debt.

"Consolidated Fixed Charges" of any Person for any period
means (without duplication) the sum of (a) Consolidated Interest Expense of such
Person for such period, (b) dividend requirements of such Person and its
consolidated Subsidiaries (whether in cash or otherwise (except dividends
payable solely in shares of Qualified Capital Stock)) with respect to Preferred
Stock paid, accrued, or scheduled to be paid or accrued during such period, in
each case to the extent attributable to such period and excluding items
eliminated in consolidation, (c) one-third of the Consolidated Operating Lease
Obligations for such period, and (d) fees paid, accrued, or scheduled to be paid
or accrued during such period by such Person and its Subsidiaries in respect of
performance bonds or other guarantees of payment. For purposes of clause (b)
above, dividend requirements shall be increased to an amount representing the
pre-tax earnings that would be required to cover such dividend requirements;
accordingly, the increased amount shall be equal to a fraction, the numerator of
which is such dividend requirements and the denominator of which is 1 minus the
applicable actual combined effective Federal, state, local and foreign income
tax rate of such Person and its Subsidiaries (expressed as a decimal), on a
consolidated basis, for the fiscal year immediately preceding the date of the
transaction giving rise to the need to calculate Consolidated Fixed Charges.

"Consolidated Interest Expense" of any Person means, for any
period, the aggregate interest (without duplication), whether expensed or
capitalized, paid, accrued, or scheduled to be paid or accrued during such
period in respect of all Debt of such Person and its consolidated Subsidiaries
(including (a) amortization of deferred financing costs and original issue
discount and non-cash interest payments or accruals, (b) the interest portion of
all deferred payment obligations, calculated in accordance with the effective
interest method, and (c) all commissions, discounts, other fees, and charges
owed with respect to letters of credit and banker's acceptance financing and
costs associated with Swap Obligations, in each case to the extent attributable
to such period determined on a consolidated basis in accordance with GAAP). For
purposes of this definition, (i) interest on a Capitalized Lease Obligation
shall be deemed to

- 6 -

accrue at an interest rate reasonably determined to be the rate of interest
implicit in such Capitalized Lease Obligation in accordance with GAAP (including
Statement of Financial Accounting Standards No. 13 of the Financial Accounting
Standards Board), and (ii) Consolidated Interest Expense attributable to any
Debt represented by the guarantee by such Person or a Subsidiary of such Person
other than with respect to Debt of such Person or a Subsidiary of such Person
shall be deemed to be the interest expense attributable to the item guaranteed.

"Consolidated Net Income" of any Person for any period means
the net income (loss) of such Person and its consolidated Subsidiaries for such
period, determined in accordance with GAAP, plus asset impairment charges, less
(without duplication) (a) all extraordinary, unusual and nonrecurring gains (but
not losses), (b) the net income, if positive, of any other Person, other than a
consolidated Subsidiary, in which such Person or any of its consolidated
subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a
consolidated Subsidiary of such Person during such period, but not in excess of
such Person's pro rata share of such other Person's aggregate net income earned
during such period or earned during the immediately preceding period and not
distributed during such period, (c) the net income, if positive, of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition, and (iv) the net income, if positive, of any Subsidiary of
such Person to the extent that the declaration or payment of dividends or
similar distributions is not at the time permitted by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule, or governmental regulation applicable to such Subsidiary.

"Consolidated Operating Lease Obligations" means, for any
period, the aggregate amount of all obligations for rent paid or accrued under
all Operating Leases of Borrower and its Subsidiaries as lessee (net of sublease
income), all as determined on a consolidated basis in conformity with GAAP.

"Debt" means, with respect to any Person, without duplication
(a) all liabilities contingent or otherwise, of such Person (i) for borrowed
money (whether or not the recourse of Lender is to the whole of the assets of
such Person or only to a portion thereof), (ii) evidenced by bonds, Note,
debentures, or similar instruments or letters of credit or representing the
balance deferred and unpaid of the purchase price of any property acquired by
such Person or services received by such Person (other than long-term service or
supply contracts which require minimum periodic payments), (iii) evidenced by
bankers' acceptances or similar instruments issued or accepted by banks or Swap
Obligations, (iv) for the payment of money relating to a Capitalized Lease
Obligation, and (v) the Attributable Debt associated with any Sale and Leaseback
Transaction; (b) reimbursement obligations of such Person with respect to
letters of credit; (c) all liabilities of others of the kind described in the
preceding clause (i) or (ii) that such Person has guaranteed or that is
otherwise its legal liability (to the extent of such guaranty or other legal
liability) other than for endorsements, with recourse, of negotiable instruments
in the ordinary course of business; (d) all obligations secured by a Lien (other
than Permitted Liens, except to the extent the obligations secured by such
Permitted Liens are otherwise included in clause (a), (b) or (c) of this
definition and are obligations of such Person) to which the property or assets
(including, without limitation, leasehold interests and any other tangible or
intangible property rights) of such Person are subject, regardless of whether
the obligations secured thereby

- 7 -

shall have been assumed by or shall otherwise be such Person's legal liability
(but, if such obligations are not assumed by such Person or are not otherwise
such Person's legal liability, the amount of such Debt shall be deemed to be
limited to the fair market value of such property or assets determined as of the
end of the preceding fiscal quarter); and (a) any and all deferrals, renewals,
extensions, refinancings, and refundings (whether direct or indirect) of, or
amendments, modifications, or supplements to, any liability of the kind
described in any of the preceding clauses (a) through (d) regardless of whether
between or among the same parties; provided, however, that, notwithstanding the
foregoing, "Debt" shall include obligations related to Drilling Production
Payments, whether denominated as Dollar-Denominated Production Payments or
Volumetric Production Payments, but shall not include Dollar-Denominated
Production Payments or Volumetric Production Payments related to Drilling
Programs.

"Default" means an event which, with the giving of notice or
passage of time or both, would constitute an Event of Default.

"Default Rate" has the meaning set forth in Section 3.1
hereof.

"Disqualified Capital Stock" means, with respect to any
Person, any Capital Stock of such Person or its Subsidiaries that, by its terms
or by the terms of any security into which it is convertible or exchangeable,
is, or upon the happening of an event or the passage of time would be, required
to be redeemed or repurchased by such Person or its Subsidiaries, including at
the option of the holder, in whole or in part, or has, or upon the happening of
an event or passage of time would have, a redemption or similar payment due, on
or prior to the maturity date of the Indenture Note.

"Documents" means, collectively, this Agreement and the
Ancillary Documents.

"Dollars" and the sign "$" means lawful money of the United
States of America.

"Dollar-Denominated Production Payments" means production
payment obligations recorded as liabilities in accordance with GAAP, together
with all undertakings and obligations in connection therewith.

"Drilling Production Payment" means a Dollar-Denominated
Production Payment or a Volumetric Production Payment conveyed to a third party
in accordance with the provisions of Sections 6.2 and 6.3.

"Drilling Program" means any current or future arrangement
between Borrower or any Subsidiary of Borrower and another Person pursuant to
which (a) such Person agrees, or has, prior to the Effective Date, agreed, to
drill, or perform operations to enhance recovery from, a well or wells on
mineral interests, owned by Borrower or such Subsidiary and (b) Borrower or such
Subsidiary agrees, or has, prior to the Effective Date, agreed, to convey or
assign to such Person an interest in such well or wells in accordance with
clause (k) of the definition of "Permitted Liens."

"Effective Date" means the date hereof.

- 8 -

"Eligible Hydrocarbon Reserves" means Hydrocarbon Reserves of
Borrower: (a) in which Borrower has defensible and indefeasible title and as to
which Lender has a first priority perfected lien and security interest (subject
only to Permitted Liens described in clauses (a), (g) and (h) of the definition
of Permitted Liens), and as to which only Permitted Liens exist, and (b) which
are set forth in the most recent Proved Reserves Report delivered to Lender or
such other reserve report prepared by an independent petroleum reserve engineer
acceptable to Lender and as adjusted in the most recent Borrowing Base
Certificate.

"Eligible Institution" means a commercial banking institution
that has combined capital and surplus of not less than $500 million and that is
rated "A" (or higher) according to Moody's Investors Service, Inc. or Standard &
Poor's Ratings Group at the time as of which any investment or rollover therein
is made.

"Environmental Laws" means, if and to the extent applicable
under the circumstances at the time in question, all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances and codes relating to the protection of the
environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, policies, guidelines, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.

"Equipment" means and includes, as to any Person, all of such
Person's now owned or hereafter acquired Vehicles, drilling rigs, workover rigs,
fracture stimulation equipment, well site compressors, rolling stock and related
equipment and other assets accounted for as equipment by such Person on its
financial statements, all proceeds thereof (from insurance or otherwise), and
all documents of title, books, records, ledger cards, files, correspondence, and
computer files, tapes, disks and related data processing software that at any
time evidence or contain information relating to the foregoing.

"Event of Default" means the occurrence and continuance of any
of the events set forth in Article VIII hereof.

"First Lien Debt" means any Debt or other obligation secured
by a Lien described in this definition, including, in each case, any
refinancings thereof:

(a) pledges of assets or deposits of cash or Cash
Equivalents to secure (i) the performance of bids, trade contracts (other than
borrowed money), leases, statutory obligations, surety bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business (or to secure reimbursement obligations or letters of credit in support
of such bonds) in an aggregate amount not in excess of 5% of the PV10 indicated
on Borrower's most recent Reserve Report at the time such pledges or deposits
are made, (ii) appeal or supercedes bonds (or to secure reimbursement
obligations or letters of credit in support of such bonds) in an amount not to
exceed $10 million at any one time outstanding, or (iii) pledges or deposits
made in the ordinary course of business in connection with worker's
compensation, unemployment insurance, and other types of social security
legislation, property insurance and liability insurance;

- 9 -

(b) Liens encumbering customary initial deposits and
margin deposits of cash or Cash Equivalents securing Swap Obligations or
Permitted Hedging Transactions and Liens encumbering contract rights under
Permitted Hedging Transactions;

(c) Liens granted on Equipment to the extent granted
to secure Debt incurred pursuant to Section 6.3 hereof;

(d) Liens granted in connection with the Presale of
Gas, provided, however, that all of the proceeds from such Presale of Gas shall
be applied to repay the outstanding Obligations;

(e) Liens created on or Production Payments granted
with respect to undivided interests in, acreage drilled or to be drilled
pursuant to Drilling Programs, on Hydrocarbons produced therefrom and on the
proceeds of such Hydrocarbons to secure or to provide provision for payment of
the Borrower's obligations under such Drilling Programs, provided, however, that
(i) the number of wells included in such program commenced in any fiscal year
does not exceed 30 per fiscal year (plus the number of wells included in
programs commenced in prior years but not yet completed), (ii) such obligations
are limited to a percentage of production from such wells, (iiii) such Liens
survive only until the Person to whom such Lien was granted has received
production with a value equal to the costs, expenses and fees related to
property and services provided or paid for by such Person plus an agreed-upon
interest component, and (iv) such Liens secure obligations that are nonrecourse
to each of Borrower or its Subsidiaries;

(f) any extension, renewal, or replacement of Liens
created or existing pursuant to any of the clauses of this definition, provided,
however, that such Liens would have otherwise been permitted under such clauses,
and provided further, that the Liens permitted by this clause (f) do not secure
any additional Debt or encumber any additional property;

(g) Liens constituting or securing (i) Royalty
Payment Obligations referred to in clause (iii) of the definition of such term
and (ii) Drilling Production Payments or;

(h) Liens on the proceeds of any property securing
First Lien Debt or on deposit accounts containing only such proceeds and which
at no time contains or contained proceeds of Receivables; and

(i) Liens (including extensions and renewals thereof)
on real or personal property, acquired after the Effective Date ("New
Property"); provided, however, that (i) such Lien is created solely for the
purpose of securing Debt incurred to finance the cost (including the cost of
improvements or construction) of New Property subject thereto and such Lien is
created prior to or within six months after the later of the acquisition, the
completion of construction, or the commencement of full operation of such New
Property, (ii) the principal amount of the Debt secured by such Lien does not
exceed 100% of such cost including costs and fees related to the financing
thereof, and (iii) any such Lien shall not extend to or cover any property or
assets other than such item of New Property, any improvements on such New
Property and any throughput, capacity or similar agreements related to the
operation of such New Property.

- 10 -

"GAAP" means generally accepted accounting principles in the
United States of America in effect from time to time.

"GB Facility Asset Sale" means:

(a) With respect to GB Pipeline, the sale of all or
substantially all of the assets (but which assets shall be exclusive of
Inventory and Receivables) of GB Pipeline other than a Sale and Leaseback
Transaction resulting in a Capital Lease which constitutes, as to GB Pipeline, a
GB Financing Document; and

(b) With respect to GB Processing, the sale of all or
substantially all of the assets (but which assets shall be exclusive of
Inventory and Receivables) of GB Processing other than a Sale and Leaseback
Transaction resulting in a Capital Lease which constitutes, as to GB Processing,
a GB Financing Document.

"GB Facility Financing" means:

(a) With respect to GB Pipeline, (i) the incurrence of
Debt by, including the renewal or extension of Debt previously incurred by, GB
Pipeline that is secured by a mortgage or deed of trust constituting, with
respect to GB Pipeline, a GB Financing Document, (ii) a Sale and Leaseback
Transaction resulting in a Capital Lease which constitutes, as to GB Pipeline, a
GB Financing Document; and

(b) With respect to GB Processing, (i) the incurrence of
Debt by, including the renewal or extension of Debt previously incurred by, GB
Processing that is secured by a mortgage or deed of trust constituting, with
respect to GB Processing, a GB Financing Document, (ii) a Sale and Leaseback
Transaction resulting in a Capital Lease which constitutes, as to GB Pipeline, a
GB Financing Document.

"GB Financing Beneficiary" means, with respect to a GB
Financing Documents, the mortgagee, beneficiary, secured party or lessor
thereunder, as the case may be.

"GB Financing Document" means:

With respect to GB Pipeline, (a) a mortgage or deed of trust
pursuant to which GB Pipeline encumbers all or substantially all of its rights,
titles and interests in and to all or substantially all of the GB Pipeline
Facility for the purpose of securing Debt of GB Processing, or (b) a Capital
Lease to which GB Pipeline is party as lessee executed by GB Pipeline in
connection with the closing of a Sale and Leaseback transaction pursuant to
which all or substantially all of GB Pipeline's rights, titles and interests in
and to all or substantially all of the GB Pipeline Facility are conveyed and
concurrently leased back by GB Pipeline; and

With respect to GB Processing, (a) a mortgage or deed of trust
pursuant to which GB Processing encumbers all or substantially all of its
rights, titles and interests in and to all or substantially all of the GB
Processing Facility for the purpose of securing Debt of GB Processing, or (b) a
Capital Lease to which GB Processing is party as lessee executed by GB
Processing in connection with the closing of a Sale and Leaseback transaction
pursuant to which

- 11 -

all or substantially all of GB Processing's rights, titles and interests in and
to all or substantially all of the GB Processing Facility are conveyed and
concurrently leased back by GB Processing.

"GB Pipeline Facility" means the dual 16 inch O.D. (gas) and 8
inch O.D. (oil) transmission pipelines, co-owned, as of the date of this
Agreement, by GB Pipeline and Davis Petroleum Pipeline L.L.C., that extend from
Lot 12, Block 139 of the San Leon Townsite, Amos Edwards League Survey, Abstract
10, Galveston County, Texas, to the Eagle Point Platform (co-owned, as of the
date of this Agreement, by Borrower and Davis Petroleum Corp.) in State Tract
331, GB Pipeline, Texas, including the real property, interests in real
property, and the personal property, plant and equipment associated with such
pipelines.

"GB Processing Facility" means the property, plant and
equipment comprising the hydrocarbon processing facility owned and operated by
GB Processing at Winnie, Texas (including the real property and interests in
real property, situated in Winnie, Jefferson County, Texas, associated with such
facility).

"GB/TransTexas Pipeline Agreement" means each of (a) the
Amended Transportation Agreement dated as of March 16, 2000, between Borrower
and GB Pipeline, as amended, and (b) each other agreement in effect at the time
in question between Borrower and GB Pipeline relating to the transportation of
Hydrocarbons by GB Pipeline through the GB Pipeline Facility.

"Governmental Body" means any nation or government, any state
or other political subdivision thereof or any entity exercising the legislative,
judicial, regulatory or administrative functions of or pertaining to a
government.

"Guarantor" means (a) each Material Subsidiary of Borrower
joining in the execution of this Agreement for the purposes of evidencing its
Guaranty and of agreeing to be bound by the terms of this Agreement, (b) each
Material Subsidiary of Borrower that becomes (or is required to become) a
guarantor of the Obligations of Borrower under this Agreement in accordance with
Article XII, and (c) each Material Subsidiary of Borrower executing a joinder
agreement in which such Material Subsidiary agrees to become and be a guarantor
of the Obligations and to be bound by the terms of this Agreement.

"Guaranty" means the guaranty of the Obligations made by each
Guarantor in favor of Lender for its benefit and for the ratable benefit of
Lender as provided in Article XII of this Agreement.

"Hazardous Substance" means, without limitation, any flammable
explosives, radon, radioactive materials, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or toxic substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.

"Hazardous Wastes" means all waste materials subject to
regulation under RCRA or applicable state law, and any other applicable Federal
and state laws now in force or hereafter enacted relating to hazardous waste
disposal.

- 12 -

"Headquarters Facility" means the real property (including the
improvements thereon, the fixtures, other than trade fixtures, affixed or
attached thereto, and the personal property used in connection with the
operation thereof) owned by Borrower and located at 1300 North Sam Houston
Parkway East, Houston, Texas.

"Hedging Subsidiary" means a Subsidiary of Borrower engaged
solely in the business of facilitating Permitted Hedging Transactions with
Borrower or any of its subsidiaries.

"Hedging Transaction" means non-speculative transactions in
futures, forwards, swaps or option contracts (including both physical and
financial settlement transactions) engaged in by Borrower or any of its
Subsidiaries as part of its normal business operations as a risk management
strategy or hedge against adverse changes in market conditions in the oil and
natural gas industry.

"Hydrocarbon Reserves" means and includes, as to any Person,
any and all of such Person's now owned or hereafter acquired Hydrocarbon
reserves in place.

"Hydrocarbons" means oil, natural gas, condensate and natural
gas liquids, each as such terms are used in the Proved Reserves Report.

"Insurance Proceeds" means the interest in and to all proceeds
(net of costs of collection, including attorney's fees) which now or hereafter
may be paid under any insurance policies now or hereafter obtained by or on
behalf of Borrower or any Guarantor in connection with any assets thereof,
together with interest payable thereon and the right to collect and receive the
same, including, without limitation, proceeds of casualty insurance, title
insurance, business interruption insurance and any other insurance now or
hereafter maintained with respect to such assets.

"Interest Rate or Currency Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars, puts and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates.

"Inventory" means and includes all of Borrower's and each of
Borrower's Subsidiaries' now owned or hereafter acquired inventory (as such term
is defined in the Uniform Commercial Code), including, without limitation,
casing, drill pipe and other supplies accounted for as inventory by Borrower on
its consolidated financial statements (excluding any Hydrocarbons), all proceeds
thereof (from insurance or otherwise), and all documents of title, books,
records, ledger cards, files, correspondence, and computer files, tapes, disks
and related data processing software that at any time evidence or contain
information relating to the foregoing.

"Investment" by any Person in any other Person means (without
duplication) (a) the acquisition (whether for cash, property, services,
securities or otherwise) of Capital Stock, bonds, Note, debentures, partnership
or other ownership interests or other securities issued by such other Person or
any agreement to make any such acquisition; (b) the making by such Person of any
deposit with, or advance, loan or other extension of credit to, such other
Person (including the purchase of property from another Person subject to an
understanding or agreement,

- 13 -

contingent or otherwise, to resell such property to such other Person and
(without duplication) any amount committed to be advanced, loaned or extended to
such other Person; (c) the entering into of any guarantee (other than any
Guaranty hereunder) of, or other credit support or contingent obligation with
respect to, Debt or other liability of such other Person; (d) the entering into
of any Swap Obligation with such other Person; or (e) the making of any capital
contribution by such Person to such other Person.

"Investment Grade Rating" means, with respect to any Person or
issue of debt securities or preferred stock, a rating in one of the four highest
letter rating categories (without regard to "+" or "-" or other modifiers) by
any rating agency or if any such rating agency has ceased using letter rating
categories or the four highest of such letter rating categories are not
considered to represent "investment grade" ratings, then the comparable
"investment grade" ratings (as designated by any such rating agency).

"Lender" has the meaning ascribed to such term in the preamble
to this Agreement and shall include each Person which is a permitted successor
or assign of Lender.

"Lien" means any mortgage, deed of trust, lien, pledge,
charge, security interest, collateral assignment or other encumbrance for
security purposes of any kind, regardless of whether filed, recorded or
otherwise perfected under applicable law (including any conditional sale or
other title retention agreement and any lease deemed to constitute a security
interest and any option or other agreement to give any security interest).

"Material Adverse Effect" means a material adverse effect on
(a) the condition, operations, assets, business or prospects of the Borrower or
any Guarantor, (b) Borrower's ability to pay the Obligations in accordance with
the terms thereof, (c) the value of the Collateral, or the Liens on the
Collateral or the priority of such Liens, or (d) the practical realization of
the benefits of Lender's and Lender' rights and remedies under this Agreement
and the Ancillary Documents.

"Material Change" means an increase or decrease of more than
10% since the then most recent Proved Reserve Report in the discounted future
net cash flows (excluding changes that result from changes in prices) from
proved oil and gas reserves of Borrower and its consolidated Subsidiaries
(before any state or federal income tax); provided, however, that the following
will be excluded from the Material Change calculation: (a) any acquisitions
since the then most recent Proved Reserve Report of oil and gas reserves that
have been estimated by independent petroleum engineers and on which a report or
reports have been prepared by such independent petroleum engineers within 12
months of the acquisition, (b) any reserves added since the then most recent
Proved Reserve Report attributable to the drilling or recompletion of wells not
included in previous reserve estimates, and (c) any disposition of properties
existing on the date of then most recent Proved Reserve Report that have been
disposed of.

"Material Subsidiary" means, at any particular time, any
Subsidiary that, together with its Subsidiaries, owns assets valued at $100,000
or more.

"Mortgage" means each mortgage, deed of trust, trust deed,
deed to secure debt, assignment, assignment of production, security agreement,
financing statement or similar document, however styled, executed by Borrower,
or any other Person, in favor of Lender or the Prepetition O&G Lenders for the
ratable benefit of Lender primarily for the purpose of creating

- 14 -

or granting a Lien on Real Property and/or Hydrocarbons, or any interests
therein, to secure all or any part of the Obligations.

"Net Cash Proceeds" means an amount equal to the aggregate
amount of cash received by Borrower and its Subsidiaries in respect of an Asset
Sale, less the sum of (a) all reasonable out-of-pocket fees, commissions, and
other expenses incurred in connection with such Asset Sale, including the amount
(estimated in good faith by Borrower) of income, franchise, sales and other
applicable taxes to be paid, payable or accrued by Borrower or any Subsidiary of
Borrower (in each case as estimated in good faith by Borrower or such Subsidiary
without giving effect to tax attributes unrelated to such Asset Sale) in
connection with such Asset Sale, and (b) the aggregate amount of cash so
received which is used to retire any then existing Debt of Borrower or its
Subsidiaries (other than the Obligations), as the case may be, which is required
by the terms of such Debt to be repaid in connection with such Asset Sale.

"Net GB Financing Proceeds" means an amount equal to the
aggregate amount of cash received by GB Pipeline or GB Processing, as the case
may be, in respect of a GB Facility Financing to which GB Pipeline or GB
Processing, as the case may be, is a party, less the sum of (a) all reasonable
out-of-pocket fees, commissions, and other expenses incurred in connection with
such GB Facility Financing, including the amount (estimated in good faith by
Borrower) of income, franchise, sales and other applicable taxes to be paid,
payable or accrued by Borrower or by GB Pipeline or GB Processing, as the case
may be (in each case as estimated in good faith by Borrower or by GB Pipeline or
GB Processing, as the case may be, without giving effect to tax attributes
unrelated to such GB Facility Financing), in connection with such GB Facility
Financing, (b) the aggregate amount of cash so received which is used to retire
any then existing Debt of GB Pipeline or GB Processing (other than the
Obligations), as the case may be, which is required by the terms of such Debt to
be repaid in connection with such GB Facility Financing, (c) the aggregate
amount of cash so received which is used to retire any then existing Debt (other
than the Obligations) that is secured by assets of GB Pipeline or GB Processing,
as the case may be, and (d) the aggregate amount of cash so received which is
used to retire indebtedness of Borrower in respect of Allowed Priority Tax
Claims under the Plan, Allowed Claims of prepetition secured creditors in class
24 in classes 5 and 6 under the Plan.

"Net Proceeds" means (a) in the case of any sale by a Person
of Qualified Capital Stock, the aggregate net cash proceeds received by such
Person from the sale of Qualified Capital Stock (other than to a Subsidiary)
after payment of reasonable out-of-pocket expenses, commissions and discounts
incurred in connection therewith, and (b) in the case of any exchange, exercise,
conversion or surrender of any outstanding securities or Debt of such Person for
or into shares of Qualified Capital Stock of such Person, the net book value of
such outstanding securities as adjusted on the books of such Person or Debt of
such Person to the extent recorded in accordance with GAAP, in each case, on the
date of such exchange, exercise, conversion or surrender (plus any additional
amount required to be paid by the holder of such Debt or securities to such
Person upon such exchange, exercise, conversion or surrender and less (i) any
and all payments made to the holders of such Debt or securities and (ii) all
other expenses incurred by such Person in connection therewith, in each case, in
so far as such payments or expenses are incident to such exchange, exercise,
conversion, or surrender).

"Net Working Capital" of any Person means (a) all current
assets of such Person and its consolidated Subsidiaries, minus (b) all current
liabilities of such Person and its

- 15 -

consolidated Subsidiaries other than the current portion of long term debt, each
item to be determined in conformity with GAAP.

"Net Worth" of any Person means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of such Person and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any amounts included therein attributable to Disqualified
Capital Stock or any equity security convertible into or exchangeable for Debt,
the cost of treasury stock (not otherwise deducted from stockholder's equity),
and the principal amount of any promissory Note receivable from the sale of the
Capital Stock of such Person or any of its Subsidiaries, each item to be
determined in conformity with GAAP.

"New Property" has the meaning specified in clause (k) in the
definition of the term "Permitted Liens" set forth in Section 1.1.

"Nominee" means any Person who has or holds any right, title
or interest in any oil and gas or mineral lease as a nominee for Borrower or any
of its Subsidiaries.

"Nominee Property" means any property, lease, interest or
other asset with respect to which any Person has or holds any right, title or
interest as a Nominee.

"Note" means the amended and restated Note attached hereto as
Exhibit 2.3.

"Obligations" means and includes any and all of Debt and/or
liabilities to Lender of the Borrower or any of the Guarantors, of every kind,
nature and description, direct or indirect, secured or unsecured, joint,
several, joint and several, absolute or contingent, due or to become due, now
existing or hereafter arising, contractual or tortious, liquidated or
unliquidated, arising under or out of or in connection with this Agreement, the
Ancillary Documents or under any other agreement between Lender or the
PrePetition O&G Lenders and Borrower and/or any of the Guarantors delivered or
given in connection therewith or herewith and all obligations of Borrower or any
of the Guarantors to Lender or the PrePetition O&G Lenders to perform acts or
refrain from taking any action hereunder or thereunder.

"Operating Lease" means, as applied to any Person, any lease
of any property (whether real, personal or mixed) by that Person as lessee which
is not a Capital Lease or a lease of a mineral interest.

"Permitted Hedging Transactions" means non-speculative
transactions in futures, forwards, swaps or option contracts (including both
physical and financial settlement transactions) engaged in by Borrower or its
Subsidiaries as part of their normal business operations as a risk-management
strategy or hedge against adverse changes in the prices of natural gas,
condensate, or oil; provided, however, that such transactions do not, on a
monthly basis, relate to more than 90% of Borrower Entities' average net
hydrocarbon production (mcfe) per month for the most recent 3-month period
measured at the time of such incurrence; and, provided, further, that, at the
time of such transaction (a) the counterparty to any such transaction is an
Eligible Institution or a Person that has an n, or (b) such counterparty's
obligation pursuant to such transaction is unconditionally guaranteed in full
by, or secured by a letter of credit issued by, an Eligible Institution or a
Person that has an Investment Grade Rating.

- 16 -

"Permitted Investment" means, when used with reference to
Borrower and its Subsidiaries:

(a) trade credit extended to Persons in the ordinary course of
business;

(b) purchases of Cash Equivalents;

(c) Investments by Borrower or its wholly owned Subsidiaries
in wholly owned Subsidiaries of Borrower;

(d) Swap Obligations;

(e) the receipt of Capital Stock in lieu of cash in connection
with the settlement of litigation;

(f) advances to officers and employees in connection with the
performance of their duties in the ordinary course of business in an amount not
to exceed $500,000 in the aggregate outstanding at any time;

(g) margin deposits in connection with Permitted Hedging
Transactions;

(j) Investments and expenditures made in the ordinary course
of business by Borrower and its Subsidiaries, and of a nature that, at the time
of expenditure, is customary in the oil and gas business as a means of actively
exploiting, exploring for, acquiring, developing, processing, gathering,
marketing or transporting oil or gas through agreements, transactions, interests
or arrangements which permit a Person to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of the oil and gas business jointly
with third parties, including, without limitation, (i) ownership interests in
oil and gas properties or gathering systems and (ii) Investments and
expenditures in the form of or pursuant to operating agreements, processing
agreements, farm-in agreements, farm-out agreements, development agreements,
area of mutual interest agreements, unitization agreements, pooling
arrangements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties; provided, however, that in the case of any joint venture engaged in
processing, gathering, marketing or transporting oil or gas, (1) all Debt of
such joint venture that would not otherwise constitute Debt of one of Borrower
Entities shall be deemed Debt of Borrower in proportion to its direct or
indirect ownership interest in such joint venture, and (2) such joint venture
shall be reasonably anticipated, at the time of Investment, to enhance the value
of the reserves of Borrower Entities or marketability of production from such
reserves;

(i) the Guaranty and any guaranty by Borrower or any
Subsidiary of Borrower that is permitted under Section 6.3(e);

(j) deposits permitted by the definition of Permitted Liens or
any extension, renewal, or replacement of any of them;

(k) an Investment in Capital Stock resulting from an Asset
Sale pursuant to Section 6.2;

- 17 -

(l) any Guaranty by Borrower of the obligations of any wholly
owned Subsidiary of Borrower to the extent such obligations so guaranteed (A) do
not constitute Debt unless and only to the extent such Debt is otherwise
permitted under Section 6.3, and (B) except to the extent such obligations
constitute Debt otherwise permitted under Section 6.3, such obligations are of
the type customarily incurred by such wholly owned Subsidiary in favor of third
parties in the ordinary course of conducting its Related Business, or

(m) other Investments, provided, however, that such
Investments do not exceed $1 million in the aggregate at any time.

"Permitted Liens" means:

(a) Liens imposed by Governmental Bodies for taxes,
assessments, or other Charges (i) not yet due or (ii) which are being contested
in good faith and by appropriate proceedings, if (i) adequate reserves with
respect thereto are maintained on the books of any of the Borrower Entities in
accordance with GAAP and (ii) such Liens (other than with respect to Permitted
Prior Liens) do not prime the Liens of Lender on the Collateral;

(b) Statutory Liens of landlords, carriers. warehousemen,
mechanics, materialmen, repairmen, mineral interest owners, or other like Liens
arising by operation of law in the ordinary course of business, provided,
however, that (i) the underlying obligations are not overdue for a period of
more than 45 days, or (ii) such Liens are being contested in good faith and by
appropriate proceedings and adequate reserves with respect thereto are
maintained on the books of any of the Borrower Entities in accordance with GAAP;

(c) Pledges of assets or deposits of cash or Cash Equivalents
to secure (o) the performance of bids, trade contracts (other than borrowed
money), leases, statutory obligations, surety bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business (or to
secure reimbursement obligations or letters of credit in support of such bonds)
in an aggregate amount not in excess of 5% of the PV10 indicated on Borrower's
most recent Proved Reserve Report at the time such pledges or deposits are made,
(ii) appeal or supercede as bonds (or to secure reimbursement obligations or
letters of credit in support of such bonds) in an amount not to exceed $10
million at any one time outstanding, or (iii) pledges or deposits made in the
ordinary course of business in connection with worker's compensation,
unemployment insurance, and other types of social security legislation, property
insurance and liability insurance;

(d) Liens encumbering customary initial deposits and margin
deposits securing Swap Obligations or Permitted Hedging Transactions and Liens
encumbering contract rights under Permitted Hedging Transactions;

(e) Pledges of assets to secure margin obligations, settlement
obligations, reimbursement obligations or letters of credit in connection with
Permitted Hedging Transactions; provided, however, that, at the time such pledge
is made (or, if such pledge secures future Permitted Hedging Transactions, at
the time any such Permitted Hedging Transaction is entered into), the maximum
aggregate exposure under such Permitted Hedging Transactions does not exceed the
greater of (1) $10 million or (2) 5% of the PV10 indicated on Borrower's then
most recent Proved Reserves Report

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(f) Easements, rights-of-way, zoning, similar restrictions and
other similar encumbrances or title defects incurred in the ordinary course of
business which, in the aggregate, are not material in amount, and which do not
in any case materially detract from the value of the property subject thereto
(as such property is used by any of Borrower or any of its Subsidiaries) or
materially interfere with the ordinary conduct of the business of any of
Borrower or any of its Subsidiaries; Liens granted in connection with the
Presale of Gas;

(g) Liens created on or Production Payments granted with
respect to undivided interests in, acreage drilled or to be drilled pursuant to
Drilling Programs, on Hydrocarbons produced therefrom and on the proceeds of
such Hydrocarbons to secure or to provide provision for payment of the Borrowed
Obligations under such Drilling Programs, provided, however, that (i) the number
of wells included in such program commenced in any fiscal year does not exceed
30 per fiscal year (plus the number of wells included in programs commenced in
prior years but not yet completed), (ii) such obligations are limited to a
percentage of production from such wells, (iii) such Liens survive only until
the Person to whom such Lien was granted has received production with a value
equal to the costs, expenses and fees related to property and services provided
or paid for by such Person plus an agreed-upon interest component, and (iv) such
Liens secure obligations that are nonrecourse to each of Borrower or its
Subsidiaries;

(h) Liens on the assets of any entity existing at the time
such assets are acquired by any of Borrower Entities, whether by merger,
consolidation, purchase of assets or otherwise so long as such Liens (u) are not
created, incurred or assumed in contemplation of such assets being acquired by
any of Borrower Entities and (ii) do not extend to any other assets of any of
Borrower or its Subsidiaries;

(i) Any extension, renewal, or replacement of Liens created
pursuant to any of the foregoing clauses provided, however, that such Liens
would have otherwise been permitted under such clauses, and provided further,
that the Liens permitted by this clause (n) do not secure any additional Debt or
encumber any additional property;

(j) Liens constituting or securing (i) Royalty Payment
Obligations and (ii) Drilling Production Payments;

(k) Liens (including extensions and renewals thereof) on real
or personal property, acquired after the Closing Date ("New Property");
provided, however, that (i) such Lien is created solely for the purpose of
securing Debt incurred to finance the cost (including the cost of improvements
or construction) of New Property subject thereto and such Lien is created prior
to or within six months after the later of the acquisition, the completion of
construction, or the commencement of full operation of such New Property, (ii)
the principal amount of the Debt secured by such Lien does not exceed 100% of
such cost including costs and fees related to the financing thereof, and (iii)
any such Lien shall not extend to or cover any property or assets other than
such item of New Property, any improvements on such New Property and any
throughput, capacity or similar agreements related to the operation of such New
Property and (4) the aggregate principal amount of debt and by liens permitted
by the clause (K) shall not exceed $1,000,000 at any time;

(l) Liens under the Security Documents; and

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(m) Liens held by the holders of the allowed Jefferies Secured
Claim, Secured Tax Claims, and. if the Bankruptcy Court so orders, the M&M Lien
Claims.

"Person" means any individual, sole proprietorship,
partnership, corporation, business trust, joint stock company, trust,
unincorporated organization, association, limited liability company,
institution, public benefit corporation, joint venture, entity or government
(whether Federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof).

"Plan" means Creditor's Joint Plan Of Reorganization For
Debtors Under Chapter 11 Of The Bankruptcy Code Submitted By Thornwood
Associates LP, dated as of June 27, 2003, and modified July 8, 2003 and has been
or shall be further modified in Case No. 02-21926, in the United States
Bankruptcy Court for the Southern District of Texas, Corpus Christi Division.

"Presale of Gas" means any advance payment agreement or other
arrangement pursuant to which Borrower or any Guarantor, having received full
payment of the purchase price for a specified quantity of Hydrocarbons prior to
the first scheduled date of delivery, is required to deliver, in one or more
installments subsequent to the date of such agreement or arrangement, such
quantity of Hydrocarbons to the purchaser of such Hydrocarbons pursuant to and
during the term of such agreement or arrangement; provided, however, that the
term "Presale of Gas" shall not include (a) any such agreement or other
arrangement covering deliveries of Hydrocarbons for a period not exceeding three
calendar months and pursuant to which Borrower or such Guarantor has received
full payment of the purchase price within 120 days of the last scheduled date of
delivery, (b) a transaction to the extent and only to the extent that it results
in the creation of any Permitted Lien under the definition of "Permitted Liens,"
hereunder (c) Permitted Hedging Transactions, or (d) an Asset Sale involving
Hydrocarbon Reserves.

"Production Payments" means Dollar Denominated Production
Payments and Volumetric Production Payments.

"Proved Reserves Report" means a report prepared by an
independent petroleum reserve engineer acceptable to Lender with respect to
proved Hydrocarbon Reserves.

"PV10" means the Valuation Amount at a 10% discount rate.

"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.

"RCRA" means the Resource Conservation and Recovery Act, 42
U.S.C. Sections 6901 et seq., as same may be amended from time to time.

"Real Property" means all of each of Borrower's and the
guarantors' right, title and interest in and to the owned and leased real
property.

"Receivables" means and includes, as to any Person, any and
all of such Person's now owned or hereafter acquired Accounts, all products and
proceeds thereof, and all books, records, ledger cards, files, correspondence,
and computer files, tapes, disks or software that at any time evidence or
contain information relating to such Person's Accounts.

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"Reference Period" with regard to any Person means the four
full fiscal quarters of such Person ended on or immediately preceding any date
upon which any determination is to be made pursuant to the terms of this
Agreement.

"Refinancing Debt" has the meaning specified in Section
6.3(f).

"Related Business" means (a) the exploration for, acquisition
of, development of, production, transportation, gathering, and processing (in
connection with natural gas and natural gas liquids only) of, crude oil, natural
gas, condensate, and natural gas liquids; provided, however, that the Related
Business shall not include any refining or distilling of Hydrocarbons other than
processing and fractionating natural gas and natural gas liquids, (b) the
drilling and energy services business and pipeline services business, (c) owning
and operating a Hedging Subsidiary, or (d) owning or operating facilities
designed for separation, dehydration, treatment, stabilization, processing or
storage of Hydrocarbons and related operations.

"Release Request" has the meaning set forth in Section 12.2.

"Restricted Investment" means any direct or indirect
Investment by Borrower or any Subsidiary of Borrower other than a Permitted
Investment.

"Restricted Payment" means, with respect to any Person, (a)
any Restricted Investment, (b) any dividend or other distribution on shares of
Capital Stock of such Person or any Subsidiary of such Person, (c) any payment
on account of the purchase, redemption, or other acquisition or retirement for
value of any shares of Capital Stock of such Person, and (d) any defeasance,
redemption, repurchase, or other acquisition or retirement for value, or any
payment in respect of any amendment in anticipation of or in connection with any
such retirement, acquisition, or defeasance, in whole or in part, of any
Subordinated Debt, directly or indirectly, of such Person or a Subsidiary of
such Person prior to the scheduled maturity or prior to any scheduled repayment
of principal in respect of such Subordinated Debt; provided, however, that the
term "Restricted Payment" does not include (i) any dividend, distribution, or
other payment on shares of Capital Stock of a Person solely in shares of
Qualified Capital Stock of such Person that is at least as junior in ranking as
the Capital Stock on which such dividend, distribution, or other payment is to
be made, (ii) any defeasance, redemption, repurchase or other acquisition or
retirement for value of Capital Stock of a Person payable in or from any
combination of (A) shares of Qualified Capital Stock of such Person and (B) the
Net Proceeds of a concurrent sale of Qualified Capital Stock of such Person, in
each case to the extent such Qualified Capital Stock is at least as junior in
ranking as the Capital Stock retired, (iii) any dividend, distribution, or other
payment to Borrower from any of its Subsidiaries, (iv) any defeasance,
redemption, repurchase, or other acquisition or retirement for value, in whole
or in part, of any Subordinated Debt of such Person payable in or from any
combination of (A) shares of Qualified Capital Stock of such Person and (B) the
Net Proceeds of a concurrent sale of Qualified Capital Stock, or both, (v) any
payments or distributions made pursuant to and in accordance with the Plan, or
(vi) the redemption, purchase, retirement or other acquisition of any Debt,
including any premium paid thereon, with the proceeds of any Refinancing Debt
permitted to be incurred pursuant to Section 6.3(f).

"Royalty Payment Obligations" means (a) royalties, overriding
royalties (including those granted in connection with Drilling Programs),
revenue interests, net revenue

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interests, net profit interests, and reversionary interests, (b) the interests
of others in pooling or unitization agreements, production sales contracts and
operating agreements, (c) Liens arising under, in connection with or related to
farm-out, farm-in, joint operating, pooling, unitization or area of mutual
interest agreements or other similar or customary arrangements, agreements or
interests, and (d) similar burdens on the property of Borrower or any Subsidiary
of Borrower; each as incurred in the ordinary course of business and to the
extent such burdens are limited in recourse to (x) the properties subject to
such interests or agreements, (y) the Hydrocarbons produced from such
properties, and (z) the proceeds of such Hydrocarbons.

"Sale and Leaseback Transaction" means an arrangement relating
to property owned on the Effective Date or thereafter acquired whereby Borrower
or a Subsidiary of Borrower transfers such property to a Person and leases it
back from such Person.

"Security Agreement" means the Restructured Security and
Pledge Agreement, dated as of the Effective Date, between Borrower and Lender,
as same may be amended from time to time.

"Security Documents" means each Mortgage, the Security
Agreement and all other security agreements, pledge agreements, mortgages, deeds
of trust, collateral assignments and other agreements or conveyances at any time
delivered to Lender or the Prepetition O&G Lenders to secure all or any part of
the Obligations of Borrower pursuant to this Agreement, any one or more of the
Security Documents, and/or the Note.

"Security Interests" means the Liens on the Collateral created
by the Security Documents in favor of Lender or the Prepetition O & G Lenders.

"Subordinated Debt" means Debt which is subordinated and
junior in right of payment to the Obligations in a manner satisfactory to
Lender.

"Subsidiary" with respect to any Person, means (a) a
corporation with respect to which such Person or its Subsidiaries owns, directly
or indirectly, at least fifty percent of such corporation's Capital Stock with
voting power, under ordinary circumstances, to elect directors, or (b) a
partnership in which such Person or a subsidiary of such Person is, at the time,
a general partner of such partnership and has more than 50% of the total voting
power of partnership interests entitled (without regard to the occurrence of any
contingency) to vote in the election of managers thereof, or (c) any other
Person (other than a corporation or a partnership) in which such Person, one or
more Subsidiaries of such Person, or such Person and one or more Subsidiaries of
such Person, directly or indirectly, at the date of determination thereof has
(i) more than a fifty percent ownership interest, or (ii) the power to elect or
direct the election of a majority of the directors or other governing body of
such other Person.

"Swap Obligation" of any Person means any Interest Rate or
Currency Agreement entered into with one or more financial institutions or one
or more futures exchanges in the ordinary course of business and not for
purposes of speculation that is designed to protect such Person against
fluctuations in (a) interest rates with respect to Debt incurred and which shall
have a notional amount no greater than 105% of the principal amount of the Debt
being hedged thereby, or (b) currency exchange rate fluctuations.

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"Term" means the Effective Date through the fifth anniversary
of the Effective Date.

"Transferee" has the meaning provided in Section 14.3 hereof.

"Valuation Amount" means, as of the date of calculation, the
value of future revenues from proven Hydrocarbon Reserves calculated on one of
the following price assumptions (a) the trailing twelve month average of prices
for oil, condensate and gas as calculated at the end of the month immediately
preceding the date of calculation the "SEC Method"), (b) the closing NYMEX spot
price (as adjusted) for the prompt month for oil, condensate and gas as of the
date of calculation held constant ("NYMEX Spot Price Method"), or (c) the price
of oil, condensate and gas for projected reserves as and when extracted during
the next five (5) years employed by the engineering firm of Cawley, Gillespie &
Associates in its report dated as of November 1, 1999, as updated and adjusted
in a manner acceptable to Agent (the "Gillespie Price Method"); provided,
however, with respect to Oil & Gas Reserves which are subject to either hedging
or purchase contracts with fixed prices, the applicable contract price shall be
utilized in determining the Valuation Amount. For purposes of calculating the
Valuation Amount on the Effective Date, the Gillespie Price Method shall be
utilized. In connection with subsequent determinations of the Valuation Amount,
the Borrower shall utilize whichever of the foregoing methods Lender determines
in its sole and absolute discretion is appropriate under the circumstances;
provided; that, unless Lender gives ten days notice to the Borrower to the
contrary, the SEC Method shall be presumed to be appropriate (subject to the
above provision).

"Vehicles" means all trucks, automobiles, trailers and other
vehicles covered by a certificate of title.

"Volumetric Production Payments" means production payment
obligations recorded as deferred revenue in accordance with GAAP, together with
all undertakings and obligations in connection therewith.

"Weighted Average Life" means, as of the date of
determination, with respect to any debt instrument, the quotient obtained by
dividing (a) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such debt instrument multiplied by the amount of such principal payment by (b)
the sum of all such principal payments.

1.2. UNIFORM COMMERCIAL CODE TERMS. All terms used herein and
defined in the Uniform Commercial Code as adopted in the State of New York shall
have the meaning given therein unless otherwise defined herein.

1.3. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein",
"hereof" and "hereunder" and other words of similar import refer to this
Agreement as a whole and not to any particular section, paragraph or
subdivision. Any pronoun used shall be deemed to cover all genders. Wherever
appropriate in the context, terms used herein in the singular also include the
plural and vice versa. All references to statutes and related regulations shall
include any amendments of same and any successor statutes and regulations. All
references to any instruments or agreements to which Lender is a party,
including, without limitation, references to

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any of the Ancillary Documents, shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.

II. PAYMENTS.

2.1. TERM LOAN. On the terms and subject to the conditions
contained in this Agreement, the Lender agrees that the Loans, as defined in the
Original Agreement held by each of the Lenders shall after the Effective Date
constitute a Term Loan to the Borrower, in the amount of $32,500,000. Any
amounts under the Term Loan that are repaid may not be reborrowed. All amounts
owed hereunder shall be paid in full no later than the maturity date of the Term
Loan.

2.2. REPAYMENT OF PRINCIPAL. The principal of the Term Loan
shall be payable annually in four equal consecutive annual payments in the
amount of $5,000,000, commencing on the first anniversary of the Effective Date,
with a final installment of the unpaid principal balance on the fifth
anniversary of the Effective Date.

2.3. ACCELERATION; NOTE. The Term Loan shall be subject to
acceleration upon the occurrence of an Event of Default under this Agreement,
the Security Agreement or the Note or termination of this Agreement and shall be
evidenced by and subject to the terms and conditions set forth in the secured
promissory note attached hereto as Exhibit 2.3 executed in favor of the Lender.

2.4. MANNER OF PAYMENT.

Except as expressly provided, herein, all payments to be made by
Borrower on account of principal and interest shall be made without set-off or
counterclaim and shall be made to Lender at the address set forth in Section
14.6 hereof or at such other address as the Lender may furnish to Borrower in
writing, in each case on or prior to 1:00 p.m., New York time, in Dollars and in
immediately available funds.

III. INTEREST AND FEES.

3.1. INTEREST. Borrower shall pay interest to Lender, at the
rate of ten percent (10%) per annum on the outstanding principal balance of the
Loan semi-annually commencing six (6) months after the Effective Date on the
first day of each month. Upon and after the occurrence of an Event of Default,
and during the continuation thereof, the Loan shall bear interest at the rate of
twelve percent (12%) per annum on the outstanding principal balance of the Loan
(the "Default Rate"), provided, however, upon the occurrence of an Event of
Default described in Section 8.5, the Default Rate shall not be imposed until
thirty (30) days from the occurrence of such Event of Default, assuming such
Event of Default is continuing as of the end of such thirty (30) day period.

3.2. COMPUTATION OF INTEREST Interest hereunder shall be
computed on the basis of a year of 365/6 days and for the actual number of days
elapsed. If any payment to be made hereunder becomes due and payable on a day
other than a Business Day, the due date thereof shall be extended to the next
succeeding Business Day and interest thereon shall be payable at the applicable
Interest Rate during such extension.

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3.3. MAXIMUM CHARGES. In no event whatsoever shall interest
and other charges charged hereunder exceed the highest rate permissible under
law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. In the event that Lender has received interest and other
charges hereunder in excess of the highest rate permissible hereto, such excess
amount shall be first applied to any unpaid principal balance owed by Borrower,
and if the then remaining excess amount is greater than the previously unpaid
principal balance, Lender shall promptly refund such excess amount to Borrower
and the provisions hereof shall be deemed amended to provide for such
permissible rate.

IV. REPRESENTATIONS AND WARRANTIES.

Each of Borrower and the Guarantors represents and warrants as follows:

4.1. AUTHORITY. Borrower and each Guarantor has full power,
authority and legal right to enter into this Agreement and the Ancillary
Documents to which it is a party and to perform all Obligations hereunder and
thereunder. The execution, delivery and performance of this Agreement and of the
Ancillary Documents (a) are within Borrower's and each Guarantor's corporate
powers, have been duly authorized, are not in contravention of law or the terms
of Borrower's or any Guarantor's by-laws, certificate of incorporation or other
applicable documents relating to Borrower's or any Guarantor's formation or to
the conduct of Borrower's or any Guarantor's business or of any material
agreement or undertaking to which Borrower or any Guarantor is a party or by
which Borrower or any Guarantor is bound, and (b) will not conflict with nor
result in any breach in any of the provisions of or constitute a default under
or result in the creation of any Lien except Permitted Liens upon any asset of
Borrower or any Guarantor under the provisions of any material agreement,
charter document, instrument, by-law, or other instrument to which Borrower or
any Guarantor is a party or by which it or its property may be bound.

4.2. FORMATION AND QUALIFICATION. Each of Borrower and each
Guarantor is duly incorporated and in good standing under the laws of the state
of its incorporation and is qualified to do business and is in good standing in
every other state or jurisdiction in which qualification and good standing are
necessary for Borrower and each Guarantor to conduct its business and own its
property except where the failure to so qualify could not reasonably be expected
to have a Material Adverse Effect. Borrower has delivered to Lender true and
complete copies of its and each of its Guarantor's certificate of incorporation
and by-laws and will promptly notify Lender of any amendment or changes thereto.

4.3. CORPORATE NAME. Neither Borrower nor any Guarantor has
been known by any other corporate name in the past five years, nor has Borrower
or any Guarantor been the surviving corporation of a merger or consolidation or
acquired all or substantially all of the assets of any Person during the
preceding five (5) years.

4.4. SECURITY INTERESTS. As of the Effective Date, Lender
shall have a legal, valid and enforceable, first priority (subject to Permitted
Liens) perfected security interest in all right, title and interest of each of
Borrower and the guarantor in the "Collateral" described in the Security
Documents. Pursuant to the terms of the Confirmation Order all liens granted
hereunder shall, for all purposes, be valid, perfected, enforceable,
non-avoidable and effective as of the date of the entry of the Confirmation
Order without any further action by the Lender or by

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the Debtors and without the execution, filing or recordation of any financing
statement, security agreement, mortgage or other document.

4.5. PLAN OF REORGANIZATION. As of the Effective Date, the
Confirmation Order has been entered and has become a final order. All other
conditions precedent to the confirmation and effectiveness of the Plan of
Reorganization have been satisfied or waived and the Effective Date has
occurred.

4.6. LOCATION OF BORROWER. Borrower's and each Guarantor's
chief executive office is located at 1300 North Sam Houston Parkway East,
Houston, Texas.

4.7. REPRESENTATIONS, WARRANTIES AND COVENANTS CONCERNING THE
MORTGAGES. Borrower and the Guarantors hereby makes all of the additional
representations, warranties and covenants set forth on Exhibit 4.7 of this
Agreement.

V. AFFIRMATIVE COVENANTS.

5.1. PAYMENT OF OBLIGATIONS. Each of Borrower and the
Guarantors shall duly and punctually pay or cause to be duly and punctually paid
the principal of and interest on all of the Obligations, including each and
every obligation owing under the Note as the same shall become due and payable
under the Note and in accordance with the terms of this Agreement.

5.2. CORPORATE EXISTENCE. Each of Borrower and the Guarantors
shall do or cause to be done all things necessary to preserve and keep in full
force and effect their respective corporate existence in accordance with the
respective organizational documents of each of them and the rights (charter and
statutory) and corporate franchises of Borrower and each Guarantor; provided,
however, that neither Borrower nor any Guarantor shall be required to preserve,
with respect to itself, any right of franchise, and with respect to any of its
Subsidiaries, any such existence, right or franchise, if (a) the Board of
Directors of Borrower or such Guarantor shall determine that the preservation
thereof is no longer desirable in the conduct of the business of Borrower or
such Guarantor and (b) the loss thereof is not disadvantageous in any material
respect to Lender.

5.3. PAYMENT OF TAXES AND OTHER CLAIMS. Each of Borrower and
the Guarantors shall pay or discharge or cause to be paid or discharged, before
the same shall become delinquent all taxes, assessments and governmental charges
(including withholding taxes and any penalties, interest and additions to taxes)
levied or imposed upon Borrower or such Guarantor or any of their respective
properties and assets; provided, however, that Borrower shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment or
charge whose amount, applicability or validity is being contested in good faith
by appropriate proceedings and for which disputed amounts adequate reserves have
been established in accordance with GAAP and so long as such taxes (other than
ad valorem and severance taxes), assessments or charges do not prime Lender's
Lien on the Collateral.

5.4. MAINTENANCE OF PROPERTIES AND INSURANCE.

(a) Each of Borrower and the Guarantors shall cause
the properties used or useful to the conduct of their respective businesses to
be maintained and kept in good

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condition, repair and working order (reasonable wear and tear excepted) and
supplied with all necessary equipment and shall cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
its reasonable judgment may be necessary, so that the business carried on in
connection therewith may be properly and advantageously conducted at all times.

(b) Each of Borrower and the Guarantors shall
provide, or shall cause to be provided, for itself and each of its Subsidiaries,
insurance (including appropriate self-insurance) against loss or damage of the
kinds that in its reasonable, good faith opinion, are adequate and appropriate
for the conduct of its business and the business of such Subsidiaries in a
prudent manner, with reputable insurers or with the government of the United
States of America or an agency or instrumentality thereof, in such amounts, with
such deductibles, and by such methods as is customary, in its reasonable, good
faith opinion, and adequate and appropriate for the conduct of Borrower's and
such Guarantor's business in a prudent manner for companies engaged in a similar
business. In addition, all such insurance shall be payable to Lender as loss
payee, as its interests may appear, under a "standard" or "Texas" loss payee
clause. Without limiting the foregoing, each of Borrower and the Guarantors
shall (i) keep all of its physical property insured with hazard insurance on an
"all risks" basis, with broad form flood and earthquake coverages, with a full
replacement cost endorsement and an "agreed amount" clause in an amount equal to
100% of the full replacement cost of such property, (ii) maintain all such
workers' compensation or similar insurance as may be required by law, and (iii)
maintain, in amounts and with deductibles equal to those generally maintained by
businesses engaged in similar activities in similar geographic areas, general
public liability insurance against claims of bodily injury, death or property
damage occurring on, in or about the properties of Borrower and the Guarantors.

All policies of insurance shall provide for at least ten days'
prior written cancellation notice to Lender. In the event of failure by Borrower
or any Guarantor to provide and maintain insurance as described herein;
provided, however, Lender may, at its option, provide such insurance and charge
the amount thereof to Borrower and/or either of the Guarantors. Borrower and the
Guarantors shall furnish Lender with certificates of insurance and policies
evidencing compliance with the foregoing insurance provision.

(c) Each of Borrower and the Guarantors shall
explore, develop and maintain (or cause to be explored, developed and
maintained) the leases, wells, units and acreage to which the mineral interests
pertain in a prudent manner, and as may be reasonably necessary for the prudent
and economical operation of (and in an effort to maximize the production
capacity of) such leases, wells, units and acreage in accordance with reasonable
and customary industry standards for similar owners of mineral interests.

(d) Each of Borrower and the Guarantors shall act
prudently and in accordance with customary industry standards in managing or
operating its assets, properties, business and investments. Borrower and each
Guarantor will keep in good working order and condition, ordinary wear and tear
excepted, all of its assets and properties which are necessary to the conduct of
its business, including, without limitation, all wells and equipment necessary
or useful in the operation of the Hydrocarbon Reserves.

- 27 -

5.5. COMPLIANCE WITH LAWS; VIOLATIONS. Each of Borrower and
the Guarantors shall comply in all material respects at all times with all Laws
applicable to the Collateral, and shall promptly notify Lender in writing of any
violation of any law, statute, regulation or ordinance of any Governmental Body,
or of any agency thereof, applicable to Borrower or any Guarantor which could
reasonably be expected to have a Material Adverse Effect.

5.6. EXECUTION OF SUPPLEMENTAL INSTRUMENTS. Each of Borrower
and the Guarantors shall execute and deliver to Lender from time to time, upon
demand, such supplemental agreements, statements, assignments and transfers, or
instructions or documents relating to the Collateral (including, without
limitation, any Liens), and such other instruments as Lender may request, in
order that the full intent of this Agreement may be carried into effect.

5.7. PAYMENT OF DEBT. Each of Borrower and the Guarantors
shall discharge or otherwise satisfy at or before maturity (subject, where
applicable, to specified grace periods and, in the case of the trade payables,
to normal payment practices) all its obligations and liabilities of whatever
nature, except when the amount or validity thereof is currently being contested
in good faith by appropriate proceedings and each of Borrower and the Guarantors
shall have provided for such reserves as Lender may reasonably deem proper and
necessary, subject at all times to any applicable subordination arrangement in
favor of Lender.

5.8. ENVIRONMENTAL MATTERS.

(a) Each of Borrower and the Guarantors shall ensure
and shall cause each of its Subsidiaries to ensure that the Real Property
remains in compliance in all material respects with all applicable Environmental
Laws.

(b) Each of Borrower and the Guarantors shall do all
things necessary to systematically assure and monitor continued compliance in
all material respects with all applicable Environmental Laws, including periodic
reviews of such compliance.

(c) In the event Borrower or any Guarantor, gives or
receives notice of any material release or threat of release of a reportable
quantity of any Hazardous Substances on its Real Property (any such event being
hereinafter referred to as a "Hazardous Discharge") or receives any notice of
material violation, request for information or notification that it is
potentially responsible for investigation or cleanup of environmental conditions
on its Real Property, demand letter or complaint, order, citation, or other
written notice with regard to any material Hazardous Discharge or material
violation of any Environmental Laws affecting its Real Property or its interest
therein (any of the foregoing is referred to herein as an "Environmental
Complaint") from any Governmental Body, then Borrower shall within five (5)
Business Days, give written notice of same to Lender detailing facts and
circumstances of which Borrower or such Guarantor is aware giving rise to the
Hazardous Discharge or Environmental Complaint and periodically inform Lender of
the status of the matter. Such information is to be provided to allow Lender to
protect its security interest in the Collateral and is not intended to create
nor shall it create any obligation upon Lender with respect thereto.

(d) Each of Borrower and the Guarantors shall respond
promptly to any Hazardous Discharge or Environmental Complaint applicable to it
and take all necessary

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action in order to safeguard the health of any Person and to avoid subjecting
the Collateral to any claim or Lien other than a Permitted Lien.

(e) Each of Borrower and the Guarantors shall each
jointly and severally defend and indemnify Lender, its officers, directors,
employees, agents and representatives and hold Lender, its officers, directors,
employees, agents and representatives harmless from and against all loss,
liability, damage and expense, claims, costs, fines and penalties, including
attorney's fees, suffered or incurred by Lender, its officers, directors,
employees, agents and representatives under or on account of any violation by
Borrower or any Guarantor of any Environmental Laws, including, without
limitation, the assertion of any Lien thereunder other than Permitted Liens,
with respect to any Hazardous Discharge, the presence of any Hazardous
Substances in violation of applicable Environmental Laws affecting Borrower's or
such Guarantor's property, whether or not the same originates or emerges from
Borrower's or such Guarantor's property or any contiguous real estate, including
any loss of value of the Collateral as a result of the foregoing, except to the
extent such loss, liability, damage and expense is directly attributable to any
Hazardous Discharge resulting from actions on the part of Lender, its officers,
directors, employees and agents. The obligations of Borrower and the Guarantors
under this Section 5.8 shall arise upon the discovery of the presence of any
Hazardous Substances in violation of applicable Environmental Laws on Borrower's
or such Guarantor's property, whether or not any federal, state, or local
environmental agency has taken or threatened any action in connection with the
presence of any Hazardous Substances. The obligation and the indemnifications
hereunder shall survive the termination of this Agreement.

(f) For purposes of this Section 5.8, all references
to Real Property shall be deemed to include all right, title and interest in and
to each of Borrower's and the Guarantors' owned and leased premises;

5.9. INSPECTIONS. At all times during normal business hours
and upon reasonable notice (unless a Default or Event of Default has occurred or
Lender reasonably suspects that a Default or Event of Default has occurred, in
which event no prior notice shall be required), Lender shall have the right to
(a) visit and inspect each of Borrower's and the Guarantors' properties and the
Collateral, (b) inspect, audit and make extracts from each of Borrower's and the
Guarantors' relevant books and records, including, but not limited to,
management letters prepared by independent accountants, and (c) discuss with
each of the Borrower's and the Guarantors' principal officers and independent
accountants, the business, assets, liabilities, financial condition, results of
operations and business prospects of Borrower.

VI. NEGATIVE COVENANTS

6.1. MERGERS, CONSOLIDATIONS AND OTHER FUNDAMENTAL CHANGES.

(a) Each of Borrower and the Guarantors hereby agree
that none of Borrower or any Guarantor shall, or permit any of its Subsidiaries
to, consolidate with or merge with or into any other Person, or, directly or
indirectly, sell, lease, assign, transfer or convey all or substantially all of
its assets (computed on a consolidated basis), to another Person or group of
Persons acting in concert, whether in a single transaction or through a series
of related

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transactions, until satisfaction in full of the Obligations and termination of
this Agreement, unless:

(i) either (x) Borrower or such Guarantor,
as the case may be, shall be the continuing Person, or (y) the Person (if other
than Borrower) formed by such consolidation or into which Borrower or such
Guarantor, as the case may be, is merged or to which all or substantially all of
the properties and assets of Borrower or such Guarantor, as the case may be, are
transferred as an entirety or substantially as an entirety (Borrower or such
Guarantor, as the case may be, or such other Person being hereinafter referred
to as the "Surviving Person") shall be a corporation or partnership organized
and validly existing under the laws of the United States, any State thereof or
the District of Columbia, and shall expressly assume, by a joinder agreement
supplemental hereto and any supplements to any Security Documents as Lender in
its sole discretion may require, executed and delivered to Lender on or prior to
the consummation of such transaction, in form satisfactory to Lender, all the
obligations of the Borrower or such Guarantor, as the case may be, under this
Agreement and the Ancillary Documents and shall execute such Security Documents
as may be necessary to maintain the Lien of Lender on the Collateral of the
Surviving Person;

(ii) no Default or Event of Default shall
exist or shall occur immediately after giving effect to such transaction;

(iii) immediately after giving effect to
such transaction, on a pro forma basis, (x) the Net Worth of the Surviving
Person is at least equal to the Net Worth of such predecessor or transferring
entity immediately prior to such transaction, and (y) the Surviving Person
immediately after giving effect on a pro forma basis to the Consolidated Fixed
Charges of the Surviving Person, (A) the Consolidated Fixed Charge Coverage
Ratio of the Surviving Person for the Reference Period is greater than 2.5 to 1,
and (B) the Surviving Person's Adjusted Consolidated Tangible Assets are equal
to or greater than 150% of the total consolidated principal amount or accreted
value, as the case may be, of Debt of the Surviving Person; and

(iv) borrower and the Guarantors have
delivered to Lender an Officers' Certificates and an Opinion of Counsel, each
stating that such consolidation, merger, assignment, or transfer and such
supplemental agreements comply with this Section 6.1(a) and that all conditions
precedent herein provided relating to such transaction have been satisfied.

For purposes of this Section 6.1(a), the Consolidated Fixed Charge Coverage
Ratio shall be determined on a pro forma consolidated basis (giving effect to
such transaction) for the four fiscal quarters immediately preceding such
transaction.

(b) For purposes of Section 6.1(a), the sale, lease,
conveyance, assignment, transfer, or other disposition of all or substantially
all of the properties and assets of one or more Subsidiaries of Borrower or any
Guarantor, which properties and assets, if held by Borrower or such Guarantor
instead of such Subsidiaries, would constitute all or substantially all of the
properties and assets of the Borrower or such Guarantor, on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of Borrower and such Guarantor.

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(c) Notwithstanding anything contained in the
foregoing to the contrary, any Subsidiary of Borrower or any Guarantor with a
Net Worth greater than zero may merge into Borrower or any Guarantor (or a
wholly owned Subsidiary of Borrower or any Guarantor) at any time, provided,
however, that Borrower shall have delivered to Lender an Officers' Certificate
stating that such Subsidiary has a Net Worth greater than zero and such merger
does not result in a Default or an Event of Default hereunder.

(d) Upon any consolidation or merger, or any transfer
of assets in accordance with Section 6.1(a), the Surviving Person formed by such
consolidation or into which Borrower or any Guarantor is merged or to which such
transfer is made shall succeed to, and be substituted for, and may exercise
every right and power of, Borrower or any Guarantor under this Agreement, the
Security Documents and the other Ancillary Documents with the same effect as if
such Surviving Person had been named as Borrower or a Guarantor herein. When a
Surviving Person duly assumes all of the obligations of Borrower pursuant
hereto, the predecessor shall be released from such obligations.

6.2. ASSET SALES

(a) Each of Borrower and the Guarantors hereby agree
that Borrower and the Guarantors shall not permit any of its Subsidiaries, until
satisfaction in full of the Obligations and termination of this Agreement, to
consummate an Asset Sale unless (x) with respect to Asset Sales by any Guarantor
an amount equal to the Net Cash Proceeds therefrom is (A) applied to repay the
Obligations in such order as Lender may determine, (B) used to make cash
payments in the ordinary course of business and consistent with past practices
that are not otherwise prohibited by this Agreement, provided, however, that the
aggregate amount so used pursuant to this clause (B) from and after the
Effective Date does not exceed $2 million (without duplication of amounts used
for Capital Expenditures in accordance with clause (C) of this Section 6.2
below), or (C) used for Capital Expenditures in a Related Business within 180
days after the date of such Asset Sale or used to reimburse Borrower and its
Subsidiaries for Capital Expenditures made prior to such Asset Sale, or (y) with
respect to proposed Asset Sales by Borrower resulting in Net Cash Proceeds
which, when aggregated with the Net Cash Proceeds of all other Asset Sales in
the same fiscal year (other than Asset Sales to which Lender has consented
hereunder) exceeds $3 million in such fiscal year, such Asset Sale shall not be
consummated unless Lender shall have given its prior written consent and
Borrower shall deposit with Lender an amount equal to the amount of such Net
Cash Proceeds in excess of $1,000,000, to be held as cash collateral for the
Obligations. Absent the existence of an Event of Default, Lender shall release
such cash collateral in an amount (i) which Borrower certifies to Lender was
previously expended by Borrower for Capital Expenditures by Borrower prior to
such Asset Sale and such expended amount has not been previously reimbursed to
Borrower, or (ii) which represents the imminent expenditure of funds by Borrower
for Capital Expenditures in a Related Business within 180 days after the date of
such Asset Sale upon the receipt by Lender of proof reasonably satisfactory to
Lender of such imminent expenditure of funds.

(b) Notwithstanding the foregoing limitations on
Asset Sales and restrictions on and requirements for the use of Net Cash
Proceeds therefrom, Borrower and Guarantors, as the case may be, may at any time
and from time to time, but subject to Subsection 6.2(c) below, effect any of the
following transactions, and the Net Cash Proceeds, if any, realized

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from any of the following transactions shall not be subject to the application
requirements of Section 6.2(a):

(i) Borrower and Guarantors may engage in
Asset Sales incident to and resulting from a
transaction expressly permitted under Section 6.1;

(ii) Borrower and Guarantors may sell,
assign, lease, license, transfer, abandon or
otherwise dispose of (a) damaged, worn out,
unserviceable or other obsolete property in the
ordinary course of business, or (b) other property no
longer necessary for the proper conduct of their
business;

(iii) Borrower and Guarantors may convey,
sell, transfer or otherwise dispose of Hydrocarbons
or other mineral products in the ordinary course of
business; and

(iv) Borrower and Guarantors may convey,
sell, transfer or otherwise dispose of Drilling
Production Payments and interests related to Drilling
Programs; provided, however, that an amount equal to
the Net Cash Proceeds of each such conveyance, sale,
transfer or other disposition shall be used for
Capital Expenditures (including without limitation
the reimbursement of Borrower and Guarantors for
Capital Expenditures already made) or to repay the
Obligations.

(c) Notwithstanding anything to the contrary
contained in this Section 6.2, Borrower shall not effect the consummation of,
and shall not permit GB Pipeline or GB Processing, as the case may be, to
consummate a GB Facility Asset Sale unless an amount equal to the Net GB
Financing Proceeds resulting therefrom is (i) distributed by GB Pipeline or GB
Processing, as the case may be, to Borrower and used by Borrower for Capital
Expenditures in a Related Business of Borrower, each within 180 days after the
date of consummation of such GB Facility Asset Sale, or (ii) to the extent not
used in accordance with clause (i) preceding with 180 days after the date of
consummation of such GB Facility Asset Sale, applied by Borrower to repay the
Obligations.

6.3. LIMITATION ON INCURRENCE OF ADDITIONAL DEBT. Except as
set forth in this Section 6.3, from and after the Effective Date, each of
Borrower and the Guarantors hereby agree that none of Borrower nor any Guarantor
shall or shall permit any of its Subsidiaries, until satisfaction in full of the
Obligations and termination of this Agreement, to directly or indirectly,
create, incur, assume, guarantee, or otherwise become liable for, contingently
or otherwise (to "Incur" or, as appropriate, an "Incurrence"), any Debt, except:

(a) the Obligations and the Guaranty;

(b) Debt in an aggregate principal amount outstanding
not to exceed at any one time $5 million;

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(c) Subordinated Debt of Borrower solely to any
wholly owned Subsidiary of Borrower, or Debt of any wholly owned Subsidiary of
Borrower solely to Borrower or to any wholly owned Subsidiary of Borrower;
provided, however, that if any Subsidiary holding such Debt, for any reason, is
no longer deemed a Subsidiary of Borrower, any outstanding Debt incurred by
Borrower or another Subsidiary pursuant to this Section 6.3 (c) shall constitute
a new incurrence of Debt and be subject to the restrictions of Section 6.3.

(d) Debt of Borrower or any Guarantor secured by a
Permitted Lien that meets the requirements of clause (c), (d), or (e) of the
definition of "Permitted Liens" set forth in Section 1.1;

(e) (1) any guaranty of Debt permitted by clauses
(a), (b), (c), or (j) hereof, which guaranty shall not be included in the
determination of the amount of Debt which may be incurred pursuant to (a), (b),
(c), or (i) hereof, or (2) any guarantee by Borrower of the obligations of any
wholly owned Subsidiary of Borrower to the extent such obligations so guaranteed
(A) do not constitute Debt (unless and only to the extent such Debt is otherwise
permitted under this Section 6.3) and (B) except to the extent such obligations
constitute Debt otherwise permitted under this Section 6.3, such obligations are
of the type customarily Incurred by such wholly owned Subsidiary in favor of
third parties in the ordinary course of conducting its Related Business;

(f) Borrower and any Guarantor may incur Debt as an
extension, renewal, replacement, or refunding of (i) any item of the Debt
permitted to be incurred by Section 6.3(j), (ii) Debt existing on the Effective
Date that is secured by assets of GB Pipeline, up to a maximum principal amount
of such Debt so extended, renewed, replaced or refunded under this Section
6.3(f) not to exceed $5 million, (iii) Debt existing on the Effective Date
(other than this Agreement) that is secured by assets of GB Processing, up to a
maximum principal amount of such Debt so extended, renewed, replaced or refunded
under this Section 6.3(f) not to exceed $5 million or (iv) the Debt permitted to
be incurred by this Section 6.3(f) (each such item of Debt is referred to as
"Refinancing Debt"), provided, however, that (1) the maximum principal amount of
each item of Refinancing Debt (or, if such item of Refinancing Debt is issued
with original issue discount, the original issue price of such item of
Refinancing Debt) permitted under this clause (f) may not exceed the lesser of
(x) the principal amount of the item of Debt being extended, renewed, replaced,
or refunded plus reasonable financing fees and other associated reasonable
out-of-pocket expenses including consent payments, premium, if any, and related
fees, in each case other than those paid to an Affiliate (collectively,
"Refinancing Fees"), or (y) if such item of Debt being extended, renewed,
replaced, or refunded was issued at an original issue discount, the original
issue price, plus amortization of the original issue discount as of the time of
the Incurrence of such item of Refinancing Debt plus Refinancing Fees, (2) each
item of Refinancing Debt has a Weighted Average Life and a final maturity that
is equal to or greater than the related Debt being extended, renewed, replaced,
or refunded at the time of such extension, renewal, replacement, or refunding,
and (3) each item of Refinancing Debt shall rank with respect to the Obligations
to an extent no less favorable in respect thereof to Lender than the related
Debt being refinanced;

(g) Debt represented by trade payables or accrued
expenses, in each case incurred on normal, customary terms in the ordinary
course of business, not overdue for a period of more than 45 days (or, if
overdue for a period of more than 45 days, being contested in

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good faith and by appropriate proceedings and adequate reserves with respect
thereto being maintained on the books of Borrower or any Guarantor in accordance
with GAAP) and not constituting any amounts due to banks or other financial
institutions;

(h) Debt of Borrower or any Guarantor to holders of
Allowed Priority Tax Claims under the Plan of Reorganization, to holders of
Allowed Claims in classes 3,4,5 or 6 under the Plan of Reorganization or under
surety bonds, letters of credit or reimbursement obligations related to or
constituting collateral securing Borrower's or any Guarantor's obligations
thereunder;

(i) letters of credit and reimbursement obligations
relating thereto to the extent collateralized by cash or Cash Equivalents;

(j) Debt outstanding on the date hereof;

(k) Debt in respect of Drilling Production Payments
not to exceed the limitation set forth in Section 7.4 of this Agreement.

Debt incurred by any Person that is not a Subsidiary of
Borrower, which Debt is outstanding at the time such Person becomes a Subsidiary
of, or is merged into, or consolidated with Borrower or one of its Subsidiaries,
as the case may be, shall be deemed to have been incurred, as the case may be,
at the time such Person becomes a Subsidiary of, or is merged into, or
consolidated with Borrower or one of its Subsidiaries.

Notwithstanding anything to the contrary contained in this
Section 6.3 or in Section 6.4, Borrower shall not effect the consummation of,
and shall not permit GB Pipeline or GB Processing, as the case may be, to
consummate, a GB Facility Financing unless (A) concurrently with the
consummation of such GB Facility Financing Borrower shall cause a duly executed
and acknowledged GB Consent and Subordination Agreement to be delivered to
Lender and (B) an amount equal to the Net GB Financing Proceeds resulting
therefrom is (i) used by GB Pipeline or GB Processing, as the case may be, for
Capital Expenditures in a Related Business of such Person within 180 days after
the date of consummation of such GB Facility Financing, (ii) distributed by GB
Pipeline or GB Processing, as the case may be, to Borrower and used by Borrower
for Capital Expenditures in a Related Business of such Borrower, each within 180
days after the date of consummation of such GB Facility Financing, (iii) used,
in part, as contemplated in the preceding clause (i), and used, in part, as
contemplated in the preceding clause (ii), or (iv) to the extent not used in
accordance with clause (i), (ii) or (iii) preceding within 180 days after the
date of consummation of such GB Facility Financing, distributed by GB Pipeline
or GB Processing, as the case may be, to Borrower and, on the 181st day after
the date of consummation of such GB Facility Financing, such amount, if any,
distributed to Borrower pursuant to this clause (iv) shall be deemed to be
included within the Net Cash Proceeds subject to application pursuant to Section
6.2(a)(x)(A).

For the purpose of determining compliance with this Section
6.3, (A) if an item of Debt meets the criteria of more than one of the types of
Debt described in the above clauses, Borrower, Guarantors or the Subsidiary in
question shall have the right to determine in its sole discretion the category
to which such Debt applies and shall not be required to include the amount and
type of such Debt in more than one of such categories and may elect to apportion

- 34 -

such item of Debt between or among any two or more of such categories otherwise
applicable, and (B) the amount of any Debt which does not pay interest in cash
or which was issued at a discount to face value shall be deemed to be equal to
the amount of the liability in respect thereof determined in accordance with
GAAP.

6.4. CREATION OF LIENS. Each of Borrower and the Guarantors
hereby agree that none of Borrower nor any Guarantor shall or permit any of its
Subsidiaries, until satisfaction in full of the Obligations and termination of
this Agreement, to create or suffer to exist any Lien upon or against any of its
property or assets now owned or hereafter acquired, except Permitted Liens. For
the purpose of determining compliance with this Section 6.4, if a Lien meets the
criteria of more than one of the types of Permitted Liens, Borrower, Guarantors
or the Subsidiary in question shall have the right to determine in its sole
discretion the category of Permitted Lien to which such Lien applies, shall not
be required to include such Lien in more than one of such categories, and may
elect to apportion such Lien between or among any two or more categories
otherwise applicable.

6.5. LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Each of
Borrower and the Guarantors hereby agree that none of Borrower nor any Guarantor
shall, or permit any of its Subsidiaries, until satisfaction in full of the
Obligations and termination of this Agreement, to make any advance, loan,
extension of credit or capital contribution to, or purchase any stock, bonds,
note, debentures or other securities of or any assets constituting a business
unit of, or make any other investment in, any Person, except pursuant to a
Permitted Investment.

6.6. LIMITATION ON RESTRICTED PAYMENTS. Each of Borrower and
the Guarantors hereby agree that none of Borrower nor any Guarantor shall, or
permit any of its Subsidiaries, until satisfaction in full of the Obligations
and termination of this Agreement, to directly or indirectly make any Restricted
Payment.

6.7. NATURE OF BUSINESS. Each of Borrower and the Guarantors
hereby agree that none of Borrower nor any Guarantor shall, or permit any of its
Subsidiaries, until satisfaction in full of the Obligations and termination of
this Agreement, to directly or indirectly engage to any substantial extent in
any line or lines of business activity other than a Related Business or such
other business activities as are reasonably related or incidental thereto.

6.8. SUBSIDIARIES. Each of Borrower and the Guarantors hereby
agree that none of Borrower nor any Guarantor shall, or permit any of its
Subsidiaries, until satisfaction in full of the Obligations and termination of
this Agreement, to form any Material Subsidiary unless such Material Subsidiary
executes and delivers a joinder to this Agreement joining this Agreement as a
Guarantor and such other documents and instruments deemed appropriate by Lender
with respect to such Subsidiary promptly following such formation or
acquisition.

6.9. FISCAL YEAR AND ACCOUNTING CHANGES. Each of Borrower and
the Guarantors hereby agree that none of Borrower nor any Guarantor shall, or
permit any of its Subsidiaries, until satisfaction in full of the Obligations
and termination of this Agreement: to change its fiscal year from January 31 or
make any significant change (i) in accounting treatment and reporting practices
except as required by GAAP or (ii) in tax reporting treatment except as required
by law; provided, however, that Borrower may change its tax year to conform to
its fiscal year.

- 35 -

6.10. AMENDMENT OF ARTICLES OF INCORPORATION, BY-LAWS. Each of
Borrower and the Guarantors hereby agree that none of Borrower nor any Guarantor
shall, or shall permit any of its Subsidiaries, until satisfaction in full of
the Obligations and termination of this Agreement, to amend or modify any
material term or provision of its Articles of Incorporation or By-Laws unless
required by law.

6.11. CHANGES RELATING TO SUBORDINATED DEBT. Each of Borrower
and the Guarantors hereby agree that none of Borrower nor any Guarantor shall,
or permit any of its Subsidiaries, until satisfaction in full of the Obligations
and termination of this Agreement, to amend the terms of any Subordinated Debt
if the effect of such amendment is to: (a) increase the interest rate on such
Debt; (b) shorten the maturity of such Subordinated Debt; (c) change any event
of default or add any covenant with respect to such Debt; (d) change the payment
provisions of such Debt; (e) change the subordination provisions thereof; or (f)
change or amend any other term if such change or amendment would materially
increase the obligations of the obligor or confer additional material rights on
the holder of such Debt in a manner adverse to Borrower or Lender.

VII. FINANCIAL COVENANTS.

Until payment of the Obligations and termination of this Agreement,
Borrower agrees that:

7.1. PV10 VALUATION. The PV 10 of the Borrower and the
Guarantos, net of any assets subject to liens senior to the liens granted to
Lender pursuant to this Agreement, shall not be less than two hundred (200%)
percent of the outstanding Obligations under this Agreement and the Note (at the
end of any calendar quarter); provided however, that if such amount falls below
200% of the such outstanding Obligations, the Borrower shall, within five (5)
days, reduce the outstanding Obligations under this Agreement and the Note by
the amount necessary to remain in compliance herewith. Any reduction in the
amount of the outstanding Obligations pursuant to this provision shall be a
permanent reduction.

VIII. EVENTS OF DEFAULT.

The occurrence of any one or more of the following events shall
constitute an Event of Default:

8.1. PAYMENT OF PRINCIPAL OR INTEREST. Failure by Borrower to
pay any principal or interest on the Obligations when due, whether at maturity
or by reason of acceleration pursuant to the terms of this Agreement or by
notice of intention to prepay, or by required prepayment or failure to pay any
other liabilities or make any other payment, fee or charge provided for herein
or in any Ancillary Document when due;

8.2. MISLEADING REPRESENTATION OR WARRANTY. Any representation
or warranty made or deemed made by Borrower in this Agreement or any Ancillary
Document or in any certificate, document or financial or other statement
furnished at any time in connection herewith or therewith shall prove to have
been misleading in any material respect on the date when made or deemed to have
been made;

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8.3. OBSERVING ARTICLE VII COVENANTS. Failure by Borrower to
perform, keep or observe any term or covenant contained in Article VII of this
Agreement, without Lender's prior written consent.

8.4. ATTACHMENT AGAINST PROPERTY. Issuance of a notice of
Lien, levy, assessment, injunction or attachment against Borrower's, any
Subsidiary's or any Guarantor's property having an aggregate value in excess of
$250,000 which is not stayed or lifted within thirty (30) days;

8.5. OBSERVING AGREEMENT COVENANTS. Failure or neglect of
Borrower to perform, keep or observe any term, provision, condition or covenant
contained in (a) this Agreement or any Ancillary Document (other than any
provision in this Article VIII) if the same shall remain unremedied for thirty
(30) days or more after written notice from Lender to Borrower of any such
failure and (b) Article VIII of this Agreement if the same shall remain
unremedied for ten (10) days or more after the occurrence thereof;

8.6. JUDGMENTS. Any judgment is rendered or judgment liens
filed against Borrower, any Subsidiary or any Guarantor for an amount in excess
of $250,000 which within thirty (30) days of such rendering or filing is not
either satisfied, stayed or discharged of record;

8.7. INSOLVENCY OF BORROWER. Borrower shall (a) apply for,
consent to or suffer the appointment of, or the taking of possession by, a
receiver, custodian, trustee, liquidator or similar fiduciary of itself or of
all or a substantial part of its property, (b) make a general assignment for the
benefit of creditors, (c) commence a voluntary case under any state or federal
bankruptcy laws (as now or hereafter in effect), (d) be adjudicated a bankrupt
or insolvent, (e) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (f) acquiesce to, or fail to have
dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws, or (g) take any action for the
purpose of effecting any of the foregoing;

8.8. INABILITY TO PAY DEBTS. Borrower shall admit in writing
its inability, or be generally unable, to pay its debts as they become due or
cease operations of its present business;

8.9. INSOLVENCY OF SUBSIDIARY OR GUARANTOR. Any Material
Subsidiary of Borrower, or any Guarantor, shall (a) apply for, consent to or
suffer the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar fiduciary of itself or of all or a
substantial part of its property, (b) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business, (c) make a general assignment for the benefit of creditors,
(c) commence a voluntary case under any state or federal bankruptcy laws (as now
or hereafter in effect), (e) be adjudicated a bankrupt or insolvent, (f) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (g) acquiesce to, or fail to have dismissed, within thirty (30) days,
any petition filed against it in any involuntary case under such bankruptcy
laws, or (viii) take any action for the purpose of effecting any of the
foregoing;

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8.10. CHANGE IN BORROWER'S CONDITION. Any change in Borrower's
condition or affairs (financial or otherwise) which in Lender's opinion
materially impairs the Collateral or the ability of Borrower to perform its
Obligations under this Agreement;

8.11. LIENS. Any Lien created hereunder or provided for hereby
or under any related agreement, with respect Collateral having a value of
$50,000 or greater, for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest (other than Permitted Liens);

8.12. DEFAULT UNDER ANCILLARY DOCUMENT. A default or event of
default has occurred and been declared and continuing under any Ancillary
Document which default shall not have been cured or waived within any applicable
grace period;

8.13. PAYMENT DEFAULT. A default by Borrower or any Subsidiary
or Guarantor in the payment, when due (after any applicable grace period or
extension for the payment thereof) of any principal of or interest on any Debt
having a principal amount, individually or in the aggregate, in excess of
$50,000, except so long as the requisite holder or holders of such Debt shall
have waived such default;

8.14. MATERIAL ADVERSE EFFECT. A default of the obligations of
Borrower or any Guarantor under any other agreement to which it is a party shall
occur which may reasonably be expected to have a Material Adverse Effect and
which default is not cured within any applicable grace period;

8.15. MATERIAL PROVISION Any material provision of this
Agreement shall, for any reason, cease to be valid and binding on any of
Borrower or the Guarantors, or Borrower or any of the Guarantors shall so claim
in writing to Lender;

8.16. MODIFICATION TO INTELLECTUAL PROPERTY OR AGREEMENTS. If
(a) any Governmental Body shall (i) revoke, terminate, suspend or adversely
modify any license, permit, patent, trademark or tradename of Borrower or any of
the Guarantors, the continuation of which is material to the continuation of
Borrower's or any of the Guarantors' business, or (ii) commence proceedings to
suspend, revoke, terminate or adversely modify any such license, permit,
trademark, tradename or patent and such proceedings shall not be dismissed or
discharged within sixty (60) days, or (iii) schedule or conduct a hearing on the
renewal of any license, permit, trademark, tradename or patent necessary for the
continuation of Borrower's or any of the Guarantors' business and the staff of
such Governmental Body issues a report recommending the termination, revocation,
suspension or material, adverse modification of such license, permit, trademark,
tradename or patent; (b) any agreement, which is necessary or material to the
operation of Borrower's or any of the Guarantors' business, shall be revoked or
terminated and not replaced by a substitute acceptable to Lender within thirty
(30) days after the date of such revocation or termination, and such revocation
or termination and non-replacement could have a Material Adverse Effect;

8.17. COLLATERAL SEIZURE. Any portion of the Collateral shall
be seized or taken by a Governmental Body;

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8.18. GUARANTOR DEFAULT. If any Guarantor defaults in the
payment of any of its payment obligations under the Guaranty and such default
shall continue for a period of ten (10) days hereunder or under the Guaranty or
if any proceeding shall be brought by Borrower or any Guarantor to challenge the
validity, binding effect of this Agreement or the Guaranty, or should this
Agreement or the Guaranty cease to be a valid, binding and enforceable
obligation of a Guarantor.

8.19. NYMEX GAS CLOSING PRICE. If the average NYMEX closing
market price of gas per MMBtu drops below $3.00 in any month, unless the PV10
attributable to proven developed producing wells of the Borrower and the
Guarantors (excluding any PV10 attributable to wells subject to Production
Payments) is at least 200% of the outstanding Obligations.

IX. LENDER'S RIGHTS AND REMEDIES AFTER DEFAULT.

9.1. RIGHTS AND REMEDIES. Upon the occurrence of (a) an Event
of Default pursuant to Section 8.7, all Obligations shall be immediately due and
payable and this Agreement, and (b) any of the other Events of Default and at
any time thereafter (such default not having previously been cured), at the
option of Lender, all Obligations shall be immediately due and payable and
Lender shall have the right to terminate this Agreement. Upon the occurrence of
any Event of Default, Lender shall have the right to exercise any and all other
rights and remedies provided for herein, under the Uniform Commercial Code and
at law or equity generally, including, without limitation, the right to
foreclose the security interests granted herein and to realize upon any
Collateral by any available judicial procedure and/or to take possession of and
sell any or all of the Collateral with or without judicial process. Lender may
enter any of Borrower's and the Guarantors' premises or other premises without
legal process and without incurring liability to Borrower or any Guarantor
therefor, and Lender may thereupon, or at any time thereafter, in its discretion
without notice or demand, take the Collateral and remove the same to such place
as Lender may deem advisable. With or without having the Collateral at the time
or place of sale, Lender may sell the Collateral, or any part thereof, at public
or private sale, at any time or place, in one or more sales, at such price or
prices, and upon such terms, either for cash, credit or future delivery, as
Lender may elect. Except as to that part of the Collateral which is perishable
or threatens to decline speedily in value or is of a type customarily sold on a
recognized market, Lender shall give Borrower and the Guarantors reasonable
notification of such sale or sales, it being agreed that in all events written
notice mailed to Borrower and the Guarantors at least five (5) days prior to
such sale or sales is reasonable notification. At any public sale Lender may bid
for and become the purchaser, and Lender or any other purchaser at any such sale
thereafter shall hold the Collateral sold absolutely free from any claim or
right of whatsoever kind, including any equity of redemption and such right and
equity are hereby expressly waived and released by Borrower and the Guarantors.
In connection with the exercise of the foregoing remedies, Lender is granted
permission, without charge, to use all of the trademarks, trade styles, trade
names, patents, patent applications, licenses, franchises and other proprietary
rights of each of Borrower and the Guarantors, which are used in connection with
the Collateral for the purpose of disposing of such Inventory and Equipment for
the purpose of completing the manufacture of such Collateral. The proceeds
realized from the sale of any Collateral shall be applied in accordance with
Section 9.5 hereof. If any deficiency shall arise, Borrower and the Guarantors
shall remain liable to Lender therefor.

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9.2. LENDER'S DISCRETION. Lender shall have the right in its
sole discretion to determine which rights, Liens, security interests or remedies
Lender may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Lender's or Lender' rights hereunder.

9.3. SETOFF. In addition to any other rights which Lender may
have under applicable law, upon the occurrence of an Event of Default hereunder,
Lender shall have a right to apply any of the property of Borrower or any
Guarantor that is held by Lender to reduce the Obligations.

9.4. RIGHTS AND REMEDIES NOT EXCLUSIVE. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not preclude the exercise of any other right or
remedies provided for herein or otherwise provided by law, all of which shall be
cumulative and not alternative.

9.5. ALLOCATION OF PAYMENTS AFTER EVENT OF DEFAULT.
Notwithstanding any other provisions of this Agreement to the contrary, after
the occurrence and during the continuance of an Event of Default, all amounts
collected or received by Lender on account of the Obligations or any other
amounts outstanding under any of the Ancillary Documents or in respect of the
Collateral may, at Lender's discretion, be paid over or delivered as follows:

FIRST: to the payment of all reasonable
out-of-pocket costs and expenses (including without
limitation, reasonable attorneys' fees) of Lender in
connection with enforcing the rights of Lender under
this Agreement and the Ancillary Documents and any
protective advances made by Lender with respect to
the Collateral under or pursuant to the terms of this
Document;

SECOND: to the payment of all of the
Obligations consisting of accrued interest;

THIRD: to the payment of the outstanding
principal amount of the Obligations;

FOURTH: to the payment of all other
Obligations and other obligations which shall have
become due and payable under the Ancillary Documents
or otherwise and not repaid pursuant to clauses
"FIRST", "SECOND" and "THIRD" above;

FIFTH: to the payment of the surplus, if
any, to whoever may be lawfully entitled to receive
such surplus.

In carrying out the foregoing, amounts received shall be
applied in the numerical order provided until exhausted prior to application to
the next succeeding category.

X. WAIVERS AND JUDICIAL PROCEEDINGS.

10.1. WAIVER OF NOTICE. Borrower and each Guarantor hereby
waives notice of non-payment of any of the Receivables, demand, presentment,
protest and notice thereof with

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respect to any and all instruments, notice of acceptance hereof, notice of loans
or advances made, credit extended, Collateral received or delivered, or any
other action taken in reliance hereon, and all other demands and notices of any
description, except such as are expressly provided for herein.

10.2. DELAY. No delay or omission on Lender's part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.

10.3. JURY WAIVER. EACH PARTY TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR
CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN
ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES
HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE
TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND
EACH PARTY HEREBY CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO
THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE
WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

XI. EFFECTIVE DATE AND TERMINATION.

11.1. TERM. This Agreement, which shall inure to the benefit
of and shall be binding upon the respective successors and permitted assigns of
each of Borrower, each Guarantor (except for any successor or assign of a
Guarantor in connection with a transaction as a result of which the relevant
Guaranty will be released or terminated pursuant to the terms of this
Agreement), and Lender, shall become effective on the date hereof and shall
continue in full force and effect until the last day of the Term unless sooner
terminated as herein provided.

11.2. TERMINATION. The termination of the Agreement shall not
affect any of the rights of Borrower, any Guarantor or Lender's, or any of the
Obligations having their inception prior to the effective date of such
termination, and the provisions hereof shall continue to be fully operative
until all transactions entered into, rights or interests created or Obligations
have been fully disposed of, concluded or liquidated. The Liens and rights
granted to Lender hereunder and the financing statements filed hereunder shall
continue in full force and effect, notwithstanding the termination of this
Agreement or the fact that Borrower's Account may from time to time be
temporarily in a zero or credit position, until all of the Obligations of
Borrower and the Guarantors have been paid or performed in full after the
termination of this Agreement or Borrower or any Guarantor has furnished Lender
with an indemnification satisfactory to Lender with respect thereto.
Accordingly, Borrower and each Guarantor waives any rights which it may have
under the Uniform Commercial Code to demand the filing of termination statements
with respect to the Collateral, and Lender shall not be required to send such
termination statements to

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Borrower, or to file them with any filing office, unless and until this
Agreement shall have been terminated in accordance with its terms and all
Obligations paid in full in immediately available funds. All representations,
warranties, covenants, waivers and agreements contained herein shall survive
termination hereof until all Obligations are paid or performed in full.

XII. RELEASE OF COLLATERAL.

12.1. DISPOSITION OF CERTAIN COLLATERAL WITHOUT REQUESTING
RELEASE. Borrower or its Subsidiaries may, so long as an Event of Default shall
not have occurred and be continuing or would exist after giving effect thereto
and without requesting or receiving the consent of Lender (a) make cash payments
(including repayments of Debt permitted to be incurred hereby) that are not
otherwise prohibited by this Agreement, and (b) dispose of property in a
transaction permitted by Section 6.2(b).

12.2. REQUESTING RELEASE OF COLLATERAL.

(a) Upon receipt of Borrower's request to release
Collateral (a "Release Request"), Lender shall execute and deliver, any
instruments deemed by Borrower to be reasonably necessary or reasonably
appropriate to release all or a part of the Collateral from the security
interests of Lender, if the provisions of this Section 12.2 have been complied
with. Any such Release Request shall request Lender to execute one or more
specifically described release instruments (which release instruments shall
accompany such Release Request) and shall certify (i) that no Event of Default
has occurred and is continuing (or with respect to a Release Request relating to
any of the Security Documents, that no event of default has occurred and is
continuing or would exist after giving effect thereto under the applicable
Security Document), and (ii) that one of the conditions of this Section 12.2 set
forth below (specifying such condition) has been fulfilled, and if such
specified condition is described in clause (i) below, that the conditions of
Section 12.1, if applicable, have been, or simultaneously with or immediately
following the release will be, fulfilled:

(1) the Collateral will be disposed of in compliance with
Section 12.1;

(2) the Net Proceeds from the Collateral will be
immediately released to Lender to repay the Obligations;

(3) the Collateral is to be released in connection with an
Asset Sale made in compliance with Section 6.2; all of the
conditions precedent to the termination of the Security
Document under which the Lien in the Collateral to be released
was created, or to the release of such Collateral from the
Lien created by such Security Document, as set forth in such
Security Document, have been satisfied;

(4) the Collateral to be released secures, or will secure
upon release, debt or other obligations that constitute First
Lien Debt; or

(5) the release of the Collateral to be released is
required pursuant to, or is required in order to effect
compliance with, the Plan or a Plan Order.

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(b) At the request of Borrower (or with respect to
releases under the Security Documents, the grantor of the security interest
thereunder), Lender shall, in lieu of releasing any Collateral pursuant to this
Section 12.2, execute and deliver a Subordination Agreement with respect to such
Collateral in form and substance acceptable to Lender.

XIII. GUARANTY.

13.1. GUARANTY. Each Guarantor jointly and severally assumes
and unconditionally guaranties to Lender the prompt payment when due (whether by
acceleration or otherwise) of all present and future Obligations, and
irrespective of the genuineness, validity, regularity or enforceability of such
Obligations, or of any instrument evidencing any of the Obligations or of any
collateral therefor or of the existence or extent of such collateral, and
irrespective of the allowability, allowance or disallowance of any or all of the
Obligations in any case commenced by or against Borrower under Title 11, United
States Code, including, without limitation, post-petition interest, fees, costs
and charges that would have accrued or been added to the Obligations but for the
commencement of such case.

13.2. NO IMPAIRMENT. Lender may at any time and from time to
time, either before or after the maturity thereof, without notice to or further
consent of any Guarantor, extend the time of payment of, exchange or surrender
any collateral for, renew or extend any of the Obligations or increase or
decrease the interest rate thereon, and may also make any agreement with
Borrower or with any other party to or person liable on any of the Obligations,
or interested therein, for the extension, renewal, payment, compromise,
discharge or release thereof, in whole or in part, or for any modification of
the terms thereof or of any Ancillary Documents, or make any election of rights
Lender may deem desirable under the United States Bankruptcy Code, as amended,
or any other federal or state bankruptcy, reorganization, moratorium or
insolvency law relating to or affecting the enforcement of creditors' rights
generally (any of the foregoing, an "Insolvency Law") without in any way
impairing or affecting the obligations of Guarantors hereunder. The obligations
of Guarantors hereunder shall be effective regardless of the subsequent
incorporation, merger or consolidation of Borrower, or any change in the
composition, nature, personnel or location of Borrower and shall extend to any
successor entity to Borrower, including a debtor in possession or the like under
any Insolvency Law.

13.3. GUARANTY ABSOLUTE. Each Guarantor guarantees that the
Obligations will be paid strictly in accordance with the terms of this Agreement
and/or any other document, instrument or agreement creating or evidencing the
Obligations, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the rights of Borrower
with respect thereto. Each Guarantor hereby knowingly accepts the full range of
risk encompassed within a contract of "continuing guaranty" which risk includes
the possibility that Borrower will contract additional indebtedness for which
such Guarantor may be liable hereunder after Borrower's financial condition or
ability to pay its lawful debts when they fall due has deteriorated, whether or
not Borrower has properly authorized incurring such additional indebtedness.
Each Guarantor acknowledges that (a) no oral representations, including any
representations to extend credit or provide other financial accommodations to
Borrower, have been made by Lender to induce such Guarantor to enter into this
Agreement and (b) any extension of credit to Borrower shall be governed solely
by the provisions of this Loan Agreement and the Ancillary Documents. The
liability of each Guarantor under this Agreement shall be absolute and
unconditional, in accordance with its terms, and shall remain in full force

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and effect without regard to, and shall not be released, suspended, discharged,
terminated or otherwise affected by, any circumstance or occurrence whatsoever,
including, without limitation: (i) any waiver, indulgence, renewal, extension,
amendment or modification of or addition, consent or supplement to or deletion
from or any other action or inaction under or in respect of this Agreement and
the Ancillary Documents or any other instruments or agreements relating to the
Obligations or any assignment or transfer of any thereof; (ii) any lack of
validity or enforceability of any of this Agreement, the Ancillary Documents or
any assignment or transfer of any thereof; (iii) any furnishing of any
additional security to Lender or its assignees or any acceptance thereof or any
release of any security by Lender or its assignees; (iv) any limitation on any
party's liability or obligation under this Agreement, the Ancillary Documents or
any other documents, instruments or agreements relating to the Obligations or
any assignment or transfer of any thereof or any invalidity or unenforceability,
in whole or in part, of any such document, instrument or agreement or any term
thereof; (v) any bankruptcy, insolvency, reorganization, composition,
adjustment, dissolution, liquidation or other like proceeding relating to
Borrower or any Guarantor, or any action taken with respect to this Agreement by
any trustee or receiver, or by any court, in any such proceeding, whether or not
the undersigned shall have notice or knowledge of any of the foregoing; (vi) any
exchange, release or nonperfection of any Collateral, or any release, or
amendment or waiver of or consent to departure from any guaranty or security,
for all or any of the Obligations; or (viii) any other circumstance which might
otherwise constitute a defense available to, or a discharge of, any Guarantor.
Any amounts due from any Guarantor to Lender shall bear interest until such
amounts are paid in full at the highest rate then applicable to the Obligations.

13.4. WAIVERS

(a) . This is a guaranty of payment and not of
collection. Lender shall be under no obligation to institute suit, exercise
rights or remedies or take any other action against Borrower or any other person
liable with respect to any of the Obligations or resort to any collateral
security held by it to secure any of the Obligations as a condition precedent to
any Guarantor being obligated to perform as agreed herein and each Guarantor
hereby waives any and all rights which it may have by statute or otherwise which
would require Lender to do any of the foregoing. Each Guarantor further consents
and agrees that Lender shall not be under any obligation to marshal any assets
in favor of any Guarantor, or against or in payment of any or all of the
Obligations. Each Guarantor hereby waives all rights of suretyship. Each
Guarantor hereby waives any rights to interpose any defense, counterclaim or
offset of any nature and description which it may have or which may exist
between and among Lender, Borrower and/or any Guarantor with respect to any
Guarantor's obligations hereunder, or which Borrower may assert on the
underlying debt, including but not limited to failure of consideration, breach
of warranty, fraud, payment (other than cash payment in full of the
Obligations), statute of frauds, bankruptcy, infancy, statute of limitations,
accord and satisfaction, and usury.

(b) Each Guarantor further waives (i) notice of the
acceptance of this Agreement, of the making of any such loans or extensions of
credit, and of all notices and demands of any kind to which such Guarantor may
be entitled, including, without limitation, notice of adverse change in
Borrower's financial condition or of any other fact which might materially
increase the risk of any Guarantor and (ii) presentment to or demand of payment
from

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anyone whomsoever liable upon any of the Obligations, protest, notices of
presentment, non-payment or protest and notice of any sale of collateral
security or any default of any sort.

13.5. PAYMENTS FROM GUARANTOR. Lender, with or without notice
to any Guarantor, may apply on account of the Obligations any payment from any
Guarantor or any other guarantor, or amounts realized from any security for the
Obligations.

13.6. NO TERMINATION. This is a continuing irrevocable
guaranty and shall remain in full force and effect and be binding upon each
Guarantor and each Guarantor's successors and assigns, until all of the
Obligations have been paid in full and this Agreement has been terminated. If
any of the present or future Obligations are guaranteed by Persons in addition
to Guarantors, the death, release or discharge in whole or in part or the
bankruptcy, merger, consolidation, incorporation, liquidation or dissolution of
one or more of them shall not discharge or affect the liabilities of any
Guarantor hereunder.

13.7. RECAPTURE. Anything in this Agreement to the contrary
notwithstanding, if Lender receives any payment or payments on account of the
liabilities guarantied hereby, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver, or any other party under
any Insolvency Law, common law or equitable doctrine, then to the extent of any
sum not finally retained by Lender, each Guarantor's obligations to Lender shall
be reinstated and this Agreement shall remain in full force and effect (or be
reinstated) until payment shall have been made to Lender, which payment shall be
due on demand.

13.8. GUARANTIES OF BORROWER AND MATERIAL SUBSIDIARIES.
Borrower and each of its Material Subsidiaries acknowledge, by their execution
and delivery of this Agreement and each Guaranty, that Lender is relying on the
provisions of this Article XIII, the Security Agreement and the Confirmation
Order in extending credit hereunder on the Effective Date, that all Material
Subsidiaries of Borrower are benefiting by the financing being provided by
Lender and that Lender would not have agreed to provide such financing without
the guaranties of all Material Subsidiaries, the Security Agreement and the
Confirmation Order.

XIV. MISCELLANEOUS.

14.1. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD
TO CONFLICTS OF LAW PROVISIONS THEREOF, APPLIED TO CONTRACTS TO BE PERFORMED
WHOLLY WITHIN THE STATE OF NEW YORK. ANY JUDICIAL PROCEEDING BROUGHT BY OR
AGAINST BORROWER OR ANY GUARANTOR WITH RESPECT TO ANY OF THE OBLIGATIONS, THIS
AGREEMENT OR ANY RELATED AGREEMENT MAY BE BROUGHT IN ANY COURT OF COMPETENT
JURISDICTION IN THE STATE OF NEW YORK, UNITED STATES OF AMERICA, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, BORROWER AND EACH GUARANTOR ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NON-EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES
TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT.
BORROWER AND EACH GUARANTOR HEREBY WAIVES

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PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED)
DIRECTED TO BORROWER OR ANY GUARANTOR AT ITS ADDRESS SET FORTH IN SECTION 17.6
AND SERVICE SO MADE SHALL BE DEEMED COMPLETED FIVE (5) DAYS AFTER THE SAME SHALL
HAVE BEEN SO DEPOSITED IN THE MAILS OF THE UNITED STATES OF AMERICA. NOTHING
HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT OF LENDER TO BRING PROCEEDINGS AGAINST BORROWER OR ANY
GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION. BORROWER AND EACH GUARANTOR
WAIVE ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED HEREUNDER
AND SHALL NOT ASSERT ANY DEFENSE BASED ON LACK OF JURISDICTION OR VENUE OR BASED
UPON FORUM NON CONVENIENS. ANY JUDICIAL PROCEEDING BY BORROWER OR ANY GUARANTOR
AGAINST LENDER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER OR CLAIM IN ANY WAY
ARISING OUT OF, RELATED TO OR CONNECTED WITH THIS AGREEMENT OR ANY RELATED
AGREEMENT, SHALL BE BROUGHT ONLY IN A FEDERAL OR STATE COURT LOCATED IN THE CITY
OF NEW YORK, STATE OF NEW YORK.

14.2. ENTIRE UNDERSTANDING

(a) This Agreement and the documents executed
concurrently herewith contain the entire understanding between Borrower,
Guarantors and Lender and supersedes all prior agreements and understandings, if
any, relating to the subject matter hereof. Any promises, representations,
warranties or guarantees not herein contained and hereinafter made shall have no
force and effect unless in writing, and executed by the party or parties making
such representations, warranties or guarantees. Neither this Agreement nor any
portion or provisions hereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Borrower and each Guarantor acknowledges that it has been
advised by counsel in connection with the execution of this Agreement and
Ancillary Documents and is not relying upon oral representations or statements
inconsistent with the terms and provisions of this Agreement.

(b) The Lender and Borrower may, subject to the
provisions of this Section 14.2(b), from time to time enter into written
supplemental agreements to this Agreement, the Note or the Ancillary Documents
executed by Borrower and each Guarantor, for the purpose of adding or deleting
any provisions or otherwise changing, varying or waiving in any manner the
rights of Lender, Borrower or Guarantors thereunder or the conditions,
provisions or terms thereof of waiving any Event of Default thereunder, but only
to the extent specified in such written agreements.

Any such supplemental agreement shall be binding upon Borrower, Guarantors and
Lender and all future holders of the Obligations. In the case of any waiver,
Borrower, Guarantors and Lender shall be restored to their former positions and
rights, and any Event of Default waived shall be deemed to be cured and not
continuing, but no waiver of a specific Event of Default shall extend to any
subsequent Event of Default (whether or not the subsequent Event of Default is
the same as the Event of Default which was waived), or impair any right
consequent thereon.

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14.3. SUCCESSORS AND ASSIGNS; NEW LENDER.

(a) This Agreement shall be binding upon and inure to
the benefit of Borrower, each Guarantor, Lender, all future holders of the
Obligations (a "Transferee") and their respective successors and assigns, except
neither Borrower nor any Guarantor may assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of Lender.

(b) Borrower and each Guarantor authorizes Lender to
disclose to any Transferee and any prospective Transferee any and all financial
information in Lender's possession concerning Borrower and each Guarantor which
has been delivered to Lender by or on behalf of Borrower or any Guarantor
pursuant to this Agreement or in connection with Lender's credit evaluation of
Borrower or any Guarantor provided such party agrees to be bound by the
confidentiality provision of Section 14.15 hereof.

14.4. APPLICATION OF PAYMENTS. Lender shall have the
continuing and exclusive right to apply or reverse and re-apply any payment and
any and all proceeds of Collateral to any portion of the Obligations. To the
extent that Borrower makes a payment or Lender receives any payment or proceeds
of the Collateral for Borrower's benefit, which are subsequently invalidated,
declared to be fraudulent or preferential, set aside or required to be repaid to
a trustee, debtor in possession, receiver, custodian or any other party under
any bankruptcy law, common law or equitable cause, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by Lender.

14.5. INDEMNITY. Borrower and each Guarantor shall indemnify
Lender and each of their respective officers, directors, Affiliates and
employees from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, fees and
disbursements of counsel) which may be imposed on, incurred by, or asserted
against Lender in any litigation, proceeding or investigation instituted or
conducted by any Governmental Body or any other Person with respect to any
aspect of, or any transaction contemplated by, or referred to in, or any matter
related to, this Agreement or the Ancillary Documents, whether or not Lender is
a party thereto, except to the extent that any of the foregoing arises out of
the willful misconduct or gross (not mere) negligence of the party being
indemnified.

14.6. NOTICE. Any notice or request hereunder may be given to
Borrower, any Guarantor or to Lender at their respective addresses set forth
below or at such other address as may hereafter be specified in a notice
designated as a notice of change of address under this Section. Any notice or
request hereunder shall be given by (a) hand delivery, (b) overnight courier,
(c) registered or certified mail, return receipt requested, or (d) telecopy to
the number set out below (or such other number as may hereafter be specified in
a notice designated as a notice of change of address) with electronic
confirmation of its receipt. Any notice or other communication required or
permitted pursuant to this Agreement shall be deemed given (a) when personally
delivered to any officer of the party to whom it is addressed, (b) on the
earlier of actual receipt thereof or three (3) days following posting thereof by
certified or registered mail, postage prepaid, or (c) upon actual receipt
thereof when sent by a recognized overnight delivery service or (d) upon actual
receipt thereof when sent by telecopier to the number set forth

- 47 -

below with electronic confirmation of its receipt, in each case addressed to
each party at its address set forth below or at such other address as has been
furnished in writing by a party to the other by like notice:

(A) If to Lender at:

Thornwood Associates LP
c/o Icahn Associates Corp.
767 Fifth Avenue, 47th Floor
New York, New York 10153
Attn: Vincent Intrieri
Keith Schaitkin, Esq.
Telephone: (212) 702-4328
Facsimile: (212) 750-5815

(B) If to Borrower or any Guarantor, at:

TransTexas Gas Corporation
c/o National Energy Group, Inc.
4925 Greenville Avenue, Suite 1400
Dallas, TX 75201
Attn: Bob Alexander
(214) 692-9211 -Telephone
(214) 692-5055 -- Facsimile

14.7. SURVIVAL. The obligations of each of Borrower and the
Guarantor under Sections 11.2, 14.5, and 14.6 shall survive termination of this
Agreement and the Ancillary Documents and payment in full of the Obligations.

14.8. SEVERABILITY. If any part of this Agreement is contrary
to, prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated thereby
and shall be given effect so far as possible.

14.9. EXPENSES. All costs and expenses including, without
limitation, reasonable attorneys' fees and disbursements incurred by Lender (i)
in all efforts made to enforce payment of any Obligation or effect collection of
any Collateral, or (ii) in connection with the entering into, modification,
amendment, administration and enforcement of this Agreement or any consents or
waivers hereunder and all related agreements, documents and instruments, or
(iii) in instituting, maintaining, preserving, enforcing and foreclosing on
Lender's security interest in or Lien on any of the Collateral, whether through
judicial proceedings or otherwise, or (iv) in defending or prosecuting any
actions or proceedings arising out of or relating to Lender's transactions with
Borrower, or (v) in connection with any advice given to Lender with respect to
its rights and obligations under this Agreement and all related agreements,
shall be reimbursed by Borrower and shall be part of the Obligations.

14.10. INJUNCTIVE RELIEF. Borrower and each Guarantor
recognizes that, in the event Borrower or any Guarantor fails to perform,
observe or discharge any of its obligations or liabilities under this Agreement,
any remedy at law may prove to be inadequate relief to Lender; therefore, Lender
shall

- 48 -

be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving that actual damages are not an adequate remedy.

14.11. CONSEQUENTIAL DAMAGES. Neither Lender nor its offices,
directors, partners, employees, agents or representatives shall be liable to
Borrower or any Guarantor for any special, direct, punitive, exemplary or
consequential damages arising from any breach of contract, tort or other wrong
relating to the establishment, administration or collection of the Obligations.

14.12. CAPTIONS. The captions at various places in this
Agreement are intended for convenience only and do not constitute and shall not
be interpreted as part of this Agreement.

14.13. COUNTERPARTS; FAXED SIGNATURES. This Agreement may be
executed in any number of and by different parties hereto on separate
counterparts, all of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.

14.14. CONSTRUCTION. The parties acknowledge that each party
and its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.

14.15. CONFIDENTIALITY. Lender and each Transferee agree to
use commercially reasonable efforts (equivalent to the efforts Lender applies to
maintain the confidentiality of its own confidential information) to maintain as
confidential all non-public information obtained by Lender or such Transferee
pursuant to this Agreement; provided, however, Lender and each Transferee may
disclose such confidential information (a) to its examiners, outside auditors,
counsel and other professional advisors (provided such advisors are informed of
and agree to be bound by the confidentiality provisions of this Agreement), (b)
to Lender or to any prospective Transferees (provided that such prospective
Transferees agree to be bound by the confidentiality provisions of the
Agreement), (c) as required or requested by any governmental authority or
representative thereof or pursuant to legal process and (d) which ceases to be
confidential through no fault of Lender; provided, further that unless
specifically prohibited by applicable law or court order, Lender and each
Transferee shall use its best efforts prior to disclosure thereof, to notify
Borrower of the applicable request for disclosure of such non-public information
(i) by a governmental authority or representative thereof (other than any such
request in connection with an examination of the financial condition of a Lender
or a Transferee by such governmental authority) or (ii) pursuant to legal
process.

[SIGNATURES FOLLOW]

- 49 -

IN WITNESS WHEREOF, each of the parties has executed this Agreement as
of the day and year first above written.

TRANSTEXAS GAS CORPORATION,
as Borrower

By: _________________________________

Its: ________________________________

GALVESTON BAY PROCESSING CORPORATION,
as Guarantor

By: _________________________________

Its: ________________________________

GALVESTON BAY PIPELINE COMPANY,
as Guarantor

By: _________________________________

Its: ________________________________

THORNWOOD ASSOCIATES LP, as Lender

By: _________________________________

Its: ________________________________

- 50 -

EXHIBIT 2.3
FORM OF AMENDED AND RESTATED O&G NOTE

EXHIBIT 4.7

ADDITIONAL REPRESENTATIONS AND COVENANTS

All defined terms herein not otherwise defined in the Agreement shall
have the meanings ascribed thereto in the Mortgages.

A. Representations and Warranties. Borrower and each Guarantor hereby
warrants and represents, as of the date hereof (giving effect to the
Confirmation Order and the transactions contemplated thereunder and under the
Plan and the Security Documents) to Lender as follows:

1. Leases. With respect to Leases covering all wells and Lands
to which value has been ascribed in that certain reserve report,
prepared as of November 1, 1999 (the "Netherland Reserve Report"), by
Netherland Sewell & Associates, LLC: (a) the Leases are valid,
subsisting leases as to all such wells and Lands, and are superior and
paramount to all other Oil and Gas Leases respecting the properties to
which they pertain and all rentals, royalties and other amounts due and
payable in accordance with the terms of the Leases have been duly paid
or provided for; (b) the Leases are in full force and effect; and (c)
except as disclosed in writing by Borrower or a Guarantor to Lender,
Borrower, and to the best of Borrower's and each Guarantor's knowledge
all other parties to the Leases, have performed in all material
respects all obligations required to be performed by them and are not
in material default under nor in receipt of any claim of material
default under any Lease, and no event has occurred which, with the
passage of time or the giving of notice or both, would cause a material
breach of, or default under, any Lease, and neither Borrower nor any
Guarantor has knowledge of any material breach or anticipated breach by
the other parties to any Lease.

2. Documents. Each of the existing Material Production Sale
Contracts is valid, binding and enforceable in accordance with its
respective terms (except as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization or moratorium or other
similar laws relating to creditor's rights and by general equitable
principles which may limit the right to obtain equitable remedies
(regardless of whether such enforceability is considered in a
proceeding at equity or at law), and except as rights to indemnity
thereunder may be limited by applicable law) and is in full force and
effect, and no material default on the part of any party thereto exists
thereunder. To the best knowledge of Borrower and each Guarantor, all
amounts due and payable in accordance with the terms of each Material
Production Sale Contract have been duly paid or provided for and the
obligations to be performed under each of the Material Production Sale
Contracts have been duly performed, in all material respects in
accordance with the terms of such contracts and any related agreements,
and in conformity with all applicable laws, rules, regulations and
orders of all courts and regulatory authorities having jurisdiction.

3. Title. Except for Permitted Liens, Borrower or a Guarantor,
as the case may be, has (a) good and indefeasible title to, and is
possessed of, the portion of the Collateral constituting the leasehold
estates under the Leases referred to in All above (b) good and
marketable title to the portion of the Collateral constituting Pipeline
Assets or other personal property for the use and operation of such
Pipeline Assets as it has been

used in the past and as it is proposed to be used in the business of
storing and transporting Hydrocarbons and other products and any lack
of title to such Pipeline Assets or personal property related thereto
has not had and will not have any material adverse effect on Borrower's
or either Guarantor's ability to use the Pipeline Assets and related
personal property as it is proposed to be used in Borrower's or e
either Guarantor's business and will not materially increase the cost
of such use, and (c) good title to the portion of the Collateral
constituting personal property that is not described in the foregoing
clause (b). Borrower owns, in the aggregate, not more than the amount
of undivided working interests and not less than the amount of net
revenue interests in the Leases set forth in the Netherland Reserve
Report. For purposes of this Paragraph (c), "working interest" shall
refer to Borrower's (or a Guarantor's) share of expense in the
applicable Lease, well or drilling and production unit shown in the
Netherland Reserve Report, and "net revenue interest" shall refer to
Borrower's (or a Guarantor's) share of production from the applicable
Lease, well or drilling and production unit after satisfaction of all
royalties, overriding royalties, production payments or similar
non-operating interests. Each of the Material Production Sale Contracts
is free from any material credit, deduction, allowance, defense,
dispute, setoff, or counterclaim (other than current charges provided
for in such instruments but not yet due and payable), and there is no
material extension or indulgence with respect thereto. Neither Borrower
nor any Guarantor is aware of any defect in or challenge to its
ownership of the rights or other interests in any of the Collateral
that would, individually or in the aggregate, materially lessen the
value of the Collateral for its use as part of the Pipeline Assets or
materially interfere with the ordinary conduct of the business of
Borrower or any Guarantor or the use of the Collateral for the purposes
for which held, except as expressly disclosed to Lender in writing.

4. Contracts. Neither Borrower nor any Guarantor is obligated
by virtue of any prepayment under any Production Sale Contract,
balancing agreement or other similar contract providing for the sale by
Borrower or any Guarantor of Hydrocarbons, helium and/or other
minerals, which contains a "take or pay" clause or under any similar
prepayment agreement or arrangement, including, without limitation,
"gas balancing agreements" to deliver Hydrocarbons, helium and/or other
minerals (amounting to a material portion of the Hydrocarbons, helium
and/or other minerals covered hereby) at some future time without then
or thereafter receiving full payment therefor.

5. Producing Wells. All producing wells located on the Lands
have been drilled, operated and produced in conformity in all material
respects with all applicable laws, rules, regulations and orders of all
regulatory authorities having jurisdiction and are subject to no
material penalties on account of past production, and such wells are,
in fact, bottomed under and are producing from, and the well bores are
wholly within, the Lands.

6. Pipelines and Pipeline Assets. All Pipelines and Pipeline
Assets have been constructed and operated in conformity in all material
respects with all applicable laws, rules, regulations and orders of all
regulatory authorities having jurisdiction and, except as expressly
disclosed in writing to Lender, are subject to no material penalties on
account of past operations.

Ex. 1.2A-2

B. Particular Covenants and Agreements of Borrower and the Guarantors.
Borrower and each of the Guarantors hereby covenants to Lender as follows:

1. Operation of Collateral. So long as the Obligations or any
part thereof remains unpaid, and whether or not Borrower is the
operator of the Collateral, each of Borrower and the Guarantors shall,
at their own expense:

(a) do all things necessary to keep
unimpaired Borrower's or such Guarantor's rights and remedies
in or under the Collateral and, except as otherwise permitted
in this Agreement, shall (i) not abandon any well or forfeit,
surrender, release or default under (other than any
abandonment, forfeiture, surrender, release or default that,
individually or in the aggregate with all other such defaults,
would not have a Material Adverse Effect) any Lease to which
value has been ascribed in the Proved Reserve Report, or in
the event Borrower or a Guarantor is not the operator, shall
use commercially reasonable efforts to prevent any of the
above, unless undertaken in the ordinary course of business,
(ii) enter into or otherwise acquire obligations under
Production Sale Contracts (as defined in the Mortgages) only
on terms and conditions to which a reasonably prudent
producer, seller, purchaser, or processor, as applicable, of
Subject Minerals, would agree, and (iii) not abandon, sell,
convey, assign, lease or otherwise transfer any right, title
or interest of Borrower or a Guarantor into or under the
Pipelines or the Pipeline Assets, or consent to any of the
foregoing except as permitted in Section 6.2 of this
Agreement;

(b) except as otherwise permitted in this
Agreement, perform or cause to be performed, each and all
covenants, agreements, terms, conditions and limitations
imposed upon Borrower or any Guarantor or any of their
respective predecessors in interest (except where any failure
to so perform or cause to be performed, individually or in the
aggregate with all other such failures, would not have a
Material Adverse Effect) and expressly contained in (i) the
Leases and any instrument or document relating thereto, and
(ii) any assignment or other form of conveyance, under or
through which the Leases, the Pipelines, Pipeline Assets,
Lands, or Rights-of-Way and Franchises, or an undivided
interest therein are now held, and perform or cause to be
performed all implied covenants and obligations imposed upon
Borrower or a Guarantor in connection therewith or with any
document or instrument relating thereto;

(c) cause, or in the event Borrower or any
Guarantor is not the operator of the Subject Interests or the
Pipeline Assets, use commercially reasonable efforts to cause,
the Subject Interests and the Pipeline Assets to be
maintained, developed, protected against drainage, and
continuously operated for the production of Hydrocarbons,
helium and/or other minerals, and the gathering, storing,
transmission and distribution of Hydrocarbons, as applicable,
in a good and workmanlike manner as would be operated by a
prudent operator and in compliance in all material respects
with all applicable operating agreements and contracts, and
all applicable federal, state and local laws, rules and
regulations, excepting those being contested in good faith in
such a manner as not to

Ex. 1.2A-3

jeopardize Lender's or Lender's rights in and to the Subject
Interests or the Pipeline Assets, as applicable;

(d) except as otherwise permitted in this
Agreement, cause to be paid, promptly as and when due and
payable, except where the failure to make any such payments
would not, individually or in the aggregate, have a Material
Adverse Effect, all rentals, delay rentals, royalties and
Obligations payable in respect of the Subject Interests, and
all expenses incurred in or arising from the operation or
development of the Subject Interests, or, in the event
Borrower or any Guarantor is not the operator, shall use its
best efforts to cause each of the foregoing to be paid;

(e) cause the Equipment necessary for the
business operations of Borrower and each Guarantor to be kept
in good and effective operating condition (reasonable wear and
tear excepted) and all repairs, renewals, replacements,
additions and improvements thereof or thereto, needful to the
production of the Subject Minerals, to be promptly made;

(f) except as otherwise permitted by this
Agreement, cause the Pipelines to be kept in good and
effective operating condition (reasonable wear and tear
excepted), and all repairs, renewals, replacements, additions
and improvements thereof or thereto, necessary to the
gathering, storing, transmission and distribution of
Hydrocarbons through the Pipelines, to be promptly made;

(g) deliver, or cause to be delivered, to
Lender a copy of any notice, demand or other communication
from any other party to any material Leases or any material
Production Sale Contract, relating to any alleged, potential
or actual material breach thereunder or material breach of any
of the covenants, agreements, terms, or limitations thereof or
purporting to terminate or in any other way adversely affect
the rights of Borrower or any of the Guarantors thereunder.

2. Recording, Etc. Each of Borrower and the Guarantors will
promptly and at their own expense record, register, deposit and file
this and every other instrument in addition or supplemental hereto in
such offices and places and at such times and as often as may be
necessary to perfect, preserve, protect and renew the lien and security
interest hereof as a recorded lien on the real property and fixtures
now or hereafter comprising the Collateral and perfected security
interest on the personal property and fixtures now or hereafter
comprising the Collateral, as the case may be and the rights and
remedies of Lender hereunder, and otherwise will do and perform all
matters or things necessary or expedient to be done or observed by
reason of any law or regulation of the State of Texas or of the United
States of America or any other state of the United States or of any
other competent authority, for the purpose of effectively creating,
maintaining and preserving the lien and security interest created by
this Agreement and the perfection and priority thereof.

3. Records, Statements and Reports. Each of Borrower and the
Guarantors will keep proper books of record and account in which
complete and correct entries will be made of their respective
transactions in accordance with GAAP consistently applied.

Ex. 1.2A-4

4. Further Assurances. Each of Borrower and the Guarantors
will execute and deliver such other and further instruments and will
use its best efforts to do such other and further acts as in the
opinion of Lender may be necessary or desirable to carry out more
effectively the purposes of the Mortgage, including, without limiting
the generality of the foregoing, (a) prompt correction of any defect
which may hereafter be discovered in the title to the Collateral or any
part thereof other than Permitted Liens or in the execution and
acknowledgment of the Mortgage, the Note or other document executed in
connection herewith or therewith, (b) prompt execution and delivery of
all division or transfer orders that in the opinion of Lender are
needed to transfer effectively to Lender the assigned proceeds of
production from the Subject Interests, (c) obtaining any necessary
governmental approvals, including, without limitation, those of the
State of Texas and (d) prompt execution of any supplements or
amendments to this Agreement for purposes of memorializing the
encumbrance of any after acquired property.

5. Adverse Claim. Each of the Borrower and the Guarantors will
warrant and forever defend, subject to the Permitted Liens, the title
to the Collateral unto Lender against every Person whomsoever lawfully
claiming the same or any part thereof. Should an adverse claim be made
against or a cloud develop upon the title to any part of the
Collateral, other than Permitted Liens, or upon the lien and security
interest created by the Mortgage, each of Borrower and the Guarantors
agrees that it will immediately defend such adverse claim or take
appropriate action to remove such cloud at its own expense, and each of
Borrower and the Guarantors further agrees that after prior notice to
such person, Lender may take such other action as it deems advisable to
protect and preserve its interests in the Collateral, and, in such
event, each of Borrower and the Guarantors will, jointly and severally,
indemnify Lender against any and all costs, attorneys' fees and other
expenses which it or they may incur in defending against any such
adverse claim or taking action to remove any such cloud.

6. Notice of Pooling or Unitization. Except as otherwise
provided in the Mortgages hereof, each of Borrower and the Guarantors
will promptly notify Lender in writing upon the first filing of any
petition or request with any governmental or regulatory agency
regarding any pooling or unitization arrangement pertaining to the
Collateral or any part thereof, and any pooling or unitization
arrangement which is imposed or which Borrower or any of the Guarantors
learns may be imposed on the Collateral or any part thereof, which
would cause Borrower or any of the Guarantors to suffer a significant
reduction in income on a monthly basis from the Collateral.

7. Compliance with Operating Agreements. Each of Borrower and
the Guarantors agrees to promptly pay all bills for labor and materials
incurred in the operation of the Collateral and will promptly pay its
share of all costs and expenses incurred under any joint operating
agreement affecting the Collateral or any portion thereof (except for
those amounts being disputed in good faith and for which adequate
reserves have been made); will furnish Lender, as and when requested,
full information as to the status of any joint account maintained with
others under any such operating agreement; will not take any action to
incur any liability or lien thereunder.

8. Evidence of Title. Promptly upon receipt of a written
request from Lender, each of Borrower and the Guarantors will furnish
and deliver, at the election of Lender,

Ex. 1.2A-5

either (a) complete or supplemental abstracts of title, as the case may
be, prepared by competent abstractors, or (b) title opinions prepared
by competent legal counsel and, in either event, covering title to
property described in the most recent Proved Reserve Report from the
sovereignty of the soil to the latest practicable date, when taken
together with abstracts and/or title opinions previously furnished to
Lender by Borrower. Should Borrower or any Guarantor fail to furnish
such abstracts upon such request, Lender may obtain such abstracts, and
any and all costs incurred thereby shall be payable by Borrower or such
Guarantor to Lender upon demand at the principal offices of Lender. The
abstracts shall be and constitute a part of the Collateral as defined
above.

9. Notification of Legal Proceedings. Each of Borrower and the
Guarantors will notify Lender promptly and in writing of the
commencement of any legal material proceedings affecting the Collateral
or any part thereof, and will take such action as may be necessary to
preserve the rights of Borrower, any Guarantor or Lender affected
thereby; and should Borrower or any Guarantor fail or refuse to take
any such action, Lender may at its election take such action on behalf
and in the name and at the cost and expense of Borrower or such
Guarantor.

10. Transfer or Division Orders. Upon written request of
Lender, each of Borrower and the Guarantors will execute and deliver
written notices of assignments to any persons, corporations or other
entities owing or which may in the future owe to Borrower monies or
accounts arising in connection with (a) any oil, gas or mineral
production from all or any portion of the Collateral; (b) any gas
contracts, processing contracts or other contracts relating to all or
any portion of the Collateral; or (c) the operation of or production
from all or any portion of the Collateral. The notices of assignments
shall advise the third parties that all of the monies or accounts
described above have been assigned to Lender, and if required by
Lender, shall also require and direct that future payments thereof,
including amounts then owing and unpaid, be paid directly to Lender.

11. Performance of Gas Contracts. Each of Borrower and the
Guarantors will perform and observe in all material respects all of its
obligations under each contract relating to the sale of gas produced
from or attributable to the Collateral except where the failure to do
so could not have a Material Adverse Effect.

12. Borrower Holds as Nominee. In the event that Lender
forecloses or attempts to foreclose on the Collateral, but such
foreclosure will not become effective as to some or all of the
Collateral unless and until the consent of a third party is obtained,
then each of Borrower and the Guarantors agrees to hold title to such
portion of the Collateral as nominee for Lender or any other party who
would have acquired such Collateral at foreclosure until such time as
the necessary consents are obtained. In acting as nominee, each of
Borrower and the Guarantors shall take such acts, and only such acts,
with respect to the Collateral as Lender or any other party who would
have acquired the same may direct and the beneficial interest under
such Collateral shall run to Lender or such other party. Each of
Borrower and the Guarantors shall enter into a nominee agreement in
form and substance satisfactory to Lender or such other party and
execute any other documents or agreements reasonably necessary to
effectuate the provisions of this section.

Ex. 1.2A-6

Ex. 1.2A-7

EXHIBIT 99.6

TRANSTEXAS GAS CORPORATION
AMENDED AND RESTATED
SECURITY AND PLEDGE AGREEMENT

This Amended and Restated Security and Pledge Agreement (this
"Agreement") is entered into as of August __, 2003 by and among TRANSTEXAS GAS
CORPORATION, a Delaware corporation ("Borrower", GALVESTON BAY PIPELINE COMPANY,
a subsidiary of Borrower ("GB Pipeline"), GALVESTON BAY PROCESSING CORPORATION,
a subsidiary of Borrower ("GB Processing" and together with Borrower and GB
Pipeline (the "Companies") and THORNWOOD ASSOCIATES LP (the "Secured Party").

RECITALS

The Companies, GMAC Commercial Credit LLC and various other financial
institutions entered into that certain Oil & Gas Revolving Credit and Term Loan
Agreement dated as of March 15, 2000 (the "Oil and Gas Agreement");

On the date hereof (the "Effective Date") the Creditor's Joint Plan of
Reorganization for Debtors Under Chapter 11 of the Bankruptcy Code Submitted by
Thornwood, dated as of June 27, 2003, as modified July 8, 2003, and as may have
been modified thereafter, in Case No. 02-21926, in the United States Bankruptcy
Court for the Southern District of Texas, Corpus Christi Division (the "Plan"),
confirmed by Order of the Bankruptcy Court (the "Confirmation Order"), became
effective;

Pursuant to the Plan, as of the date hereof, each holder of an Allowed
Prepetition O&G Claim, in full satisfaction, settlement, release and discharge
of, and exchange for, such Claim received (i) Cash in a sum equal to its pro
rata share of the Allowed O&G Claim less $32.5 million and (ii) its pro rata
share of the Restructured O&G Note in principal amount of $32.5 million and
Thornwood paid to the Prepetition O&G Lenders pro rata the Cash set forth in
paragraph (i) hereto and an amount equal to the principal amount of the
Restructured O&G Note, which Note under the terms of the Plan, was issued
directly by the Reogranized Debtors to Thornwood. Pursuant to the Plan, the
Reorganized Debtors amended and restated the Oil & Gas Agreement (the
"Restructured O&Gas Agreement") and are hereby amending and restating the
Security and Pledge Agreement entered into as of March 15, 2000;

In order to continue to secure the payment and performance in full of
the obligations of the Companies under the Restructured O &G Agreement, the
parties hereto desire to set forth their mutual understanding and certain
agreements regarding the terms and conditions of the grant of a security
interest in Collateral (as defined below);

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Companies and the Secured
Party hereby agree as follows:

Section 1. Definitions.

(a) As used in this Agreement, capitalized terms not otherwise
defined herein have the meanings set forth in the Restructured O&G
Agreement or the Plan, and the

following terms shall have the respective meanings set forth below
(such meanings to be equally applicable to both the singular and plural
forms of the terms defined):

"Collateral" shall mean, collectively, the UCC Collateral and
the Pledged Securities.

"Contract Rights" shall mean all contracts, operating
agreements, mineral purchase agreements, rights of way, easements,
surface leases, permits, licenses, pooling or unitization agreements,
pooling designations and pooling orders and all other contracts or
agreements pertaining to or affecting the Collateral or which were
executed in connection with the drilling for, producing, processing,
treating, handling, storing, transporting or marketing oil, gas or
other minerals from the Collateral or from any properties unitized or
pooled therewith, including, but not limited to, the contracts listed
on Schedule 1(a) attached hereto.

"Default" and "Event of Default" shall have the meanings
assigned to those terms in Section 6(a) of this Agreement.

"Equipment" shall mean and include all of the now owned or
hereafter acquired "equipment" of each of the Companies as such term is
defined in Article 9 of the UCC, including without limitation, all
furniture, fixtures, goods, Vehicles, drilling rigs, workover rigs,
fracture stimulation equipment, well site compressors, rolling stock,
assets constituting part of a natural gas pipeline or the compression
or dehydration equipment used in the operation of any such pipeline and
related equipment and other assets accounted for as equipment by the
Companies on their respective financial statements, all proceeds
thereof, and all documents of title, books, records, ledger cards,
files, correspondence and computer files, tapes, disks and related data
processing software that at any time evidence or contain information
relating to the foregoing.

"GAAP" means generally accepted accounting principles of the
United States of America, consistently applied.

"General Intangibles" shall mean and include any and all of
now owned or hereafter acquired "general intangibles" of each of the
Companies as such term is defined in Article 9 of the UCC, including
without limitation, all trademarks, tradenames, tradestyles, trade
secrets, equipment formulation, manufacturing procedures, quality
control procedures, product specifications, patents, patent
applications, copyrights, registrations, contract rights, choses in
action, causes of action, tort claims, payment intangibles, letter of
credit rights, corporate or other business records, inventions,
designs, goodwill, claims under guarantees, licenses, franchises, tax
refunds, tax refund claims, computer programs, computer data bases,
computer program flow diagrams, source codes, object codes and all
other intangible property of every kind and nature.

"Hydrocarbons" shall mean oil, natural gas, condensate and
natural gas liquids.

"Inventory" shall mean and include all of now owned or
hereafter acquired "inventory" of each of the Companies as such term is
defined in the UCC, including, without limitation, all drill casing,
drill pipe and other supplies accounted for as inventory

2

by the Companies on its financial statements (excluding Hydrocarbons),
all other goods, merchandise and other personal property, wherever
located, to be furnished under any contract of service or held for sale
or lease, all proceeds thereof, and all documents of title, books,
records, ledger cards, files, correspondence, and computer files,
tapes, disks and related data processing software that at any time
evidence or contain information relating to the foregoing.

"Investment Property" shall mean and include all of the now
owned or hereafter acquired "investment property" of each of the
Companies as such term is defined in Article 9 of the UCC.

"Jefferies Documentation" shall mean the Mortgage, Deed of
Trust, Assignment, Security Agreement and Financing Statement,
effective December 31, 1998, made by GB Processing in favor of
Jefferies, the Amended and Restated Promissory Note, dated August __,
2003 in the principal amount of $3,226,872.84, made by the Companies in
favor of Jefferies; and any amendments or supplements to the foregoing
as of the date hereof.

"Jefferies" means Jefferies Analytical Trading Group, Inc., a
Delaware Corporation.

"Jefferies Lien" shall mean pledge of the stock of GB
Processing Company owned by the Companies in favor of Jefferies as
security for Borrower's obligations to Jefferies under the Jefferies
Documentation.

"Lands" shall have the meaning set forth in the Mortgage.

"Leases" shall have the meaning set forth in the Mortgage.

"Mortgage" shall mean, collectively, those certain Mortgages,
Deeds of Trust, Assignments of Production, Security and Financing
Statements executed by any of the Companies for the benefit of Secured
Party to grant a Lien on such Real Property and/or Hydrocarbons, or any
interest therein, to secure all of the Obligations.

"Obligations" shall have the meaning set forth in the
Restructured O&G Agreement.

"Oil and Gas Leases" shall include oil, gas and mineral leases
and shall also include subleases and assignments of operating rights.

"Pipelines" shall mean the Pipeline Assets and all pipelines
owned and/or operated by any of the Companies for the gathering,
transmission or distribution of Hydrocarbons, and any interests in real
property relating thereto.

"Pipeline Assets" shall mean all parts or aspects of the gas
pipeline system of any the Companies now or hereafter situated on any
of the Lands, Rights-of-Way and Franchises, and all fixtures,
improvements, equipment, surface or subsurface machinery, facilities,
supplies, replacement parts, vehicles of every description, all process
control

3

computer systems and equipment or other property of whatsoever kind or
nature, including, without limitation, all buildings, structures,
machinery, gas processing plants, Pipelines, stations, substations,
compression or dehydration equipment, pumps, pumping stations, meter
houses, metering stations, regulator houses, ponds, tanks, scrapers and
scraper traps, fittings, valves, connections, cathodic or electrical
protection by-passes, regulators, drips, meters, pumps, pumping units,
pumping stations, storage or tankage facilities, engines, pipes, gates,
telephone and telegraph lines, electric power lines, poles, wires,
casings, radio towers, fixtures, mechanical equipment, electrical
equipment, computer equipment and software, machine shops and other
equipment, used or useful in connection therewith; together with all of
the Companies' liquid hydrocarbons, carbon dioxide, natural gas
liquids, refined petroleum products and other inventory fuels, carbon,
chemicals, electric energy and other consumable materials or products
manufactured, processed, generated, produced, transmitted, stored
(whether above or below ground) or purchased by any of the Companies
for sale, exchange, distribution, consumption or transmission by any of
the Companies, including, without limitation, all system gas, drip gas
and line fill.

"Pledged Securities" shall have the meaning assigned to that
term in Section 2(b) of this Agreement.

"Production Sale Contracts" shall mean, except to the extent
that the same constitute Receivables, all contracts now or hereafter in
effect, including, without limitation, any gas sales contracts, entered
into by any of the Companies, or the Companies' predecessors in
interest, for the production, sale, purchase, exchange or processing of
Subject Minerals (as defined in the Mortgage), including - but not
limited to - any of the foregoing contracts listed on SCHEDULE 1(a) and
the Contract Rights related thereto.

"Receivables" shall mean and include, any and all of the now
owned or hereafter acquired "accounts" of any of the Companies as such
term is defined in Article 9 of the UCC, all products and proceeds
thereof, and all books, records, ledger cards, files, correspondence,
and computer files, tapes, disks or software that at any time evidence
or contain information relating to the foregoing.

"Rights-of-Way and Franchises" shall mean all leases,
leaseholds, easements, rights-of-way, licenses, franchises, privileges,
permits, ordinances, grants, rights, consents, servitudes, surface
leases or rights, amendatory grants and interests in land for the
installation, maintenance and operation of the Pipelines or the
Pipeline Assets or any portion thereof, now owned or held by any of the
Companies, including, without limitation, those leases, leaseholds,
easements, rights-of-way, licenses, franchises, privileges, permits,
ordinances, grants, rights, consents, servitudes, surface leases or
rights, amendatory grants and interests in land applicable to the
Pipelines or the Pipeline Assets owned or held by any of the Companies
and those leases, leaseholds, easements, rights-of-way, licenses,
franchises, privileges, permits, ordinances, grants, rights, consents,
servitudes, surfaces leases or rights, amendatory grants and interests
in land owned or held by any of the Companies and described in the
Mortgage.

4

"Subject Interests" shall mean each kind and character of
right, title, interest or estate, whether now owned or hereafter
acquired, which any of the Companies has in, under or to the Leases and
all right, title, interest or estate, whether now owned or hereafter
acquired, which any of the Companies has in and to the Lands (as
defined in the Mortgage), together with each kind and character of
right, title, interest or estate now or hereafter vested in Mortgagor
in and to any and all overriding royalty interests, mineral interests,
leasehold interests, mineral rights, royalty interests, net profits
interests, oil payments, production payments, carried interests and all
other properties or interests of every kind or character which relate
to any of the Lands or Leases, whether such right, title, interest or
estate be under and by virtue of a Lease, a unitization or pooling
agreement, a unitization or pooling order, a mineral deed, a royalty
deed, an operating agreement, a revenue sharing agreement, a division
order, a transfer order, a farmout agreement, a fee simple conveyance
or any other type of contract, conveyance or instrument or under any
other type of claim or title, legal or equitable, recorded or
unrecorded, all as the same shall be enlarged by the discharge of any
payments out of production or by the removal of any charges or
encumbrances to which any of same are subject.

"UCC" means the Uniform Commercial Code as in effect in the
State of New York.

"UCC Collateral" shall have the meaning assigned to that term
in Section 2 of this Agreement.

"Vehicles" means all trucks, automobiles, trailers and other
vehicles covered by a certificate of title.

(b) All terms used in this Agreement which are defined in the
UCC, other than those which are defined in the Restructured O&G
Agreement or specifically defined in Section 1(a) above, shall have the
same meaning herein as in the UCC.

Section 2. Continuance of and Grant of Security Interest.

(a) The parties agree that, in accordance with the Plan and
the Confirmation Order, all liens granted hereunder shall, for all
purposes, be valid, perfected, enforceable, non-avoidable and effective
as of the Effective Date without any further action by the Thornwood or
by the Debtors and without the execution, filing or recordation of any
financing statement, security agreement, mortgage or other document.
Each of the Companies hereby further grants to the Secured Party, to
secure the payment and performance in full of the Obligations, a
continuing security interest in and a lien on and so pledges and
assigns to the Secured Party all of the Companies' right, title and
interest in, to and under any and all of the following described
property, assets and rights, in each case, wherever located, whether
now owned or hereafter acquired or arising, all accessions and
additions thereto, all substitutions and replacements therefor, and all
proceeds and products thereof and assigns all rights in and to all
collateral securing the following described property, assets and
rights:

(i) all Receivables;

5

(ii) all Inventory;

(iii) all Equipment;

(iv) all General Intangibles;

(v) all Investment Property;

(vi) all Subject Interests, the Subject Minerals,
Hydrocarbons;

(vii) all Contract Rights and Production Sale
Contracts;

(viii) all Leases and the Lands;

(ix) all Pipelines;

(x) all Pipeline Assets;

(xi) all Rights-of-Way and Franchises;

(xii) all unitization, communitization, operating
agreements, pooling agreements and declarations of pooled
units and the properties covered and the units created thereby
(including all units formed under orders, regulations, rules
or other official acts of any federal, state or other
governmental agency providing for pooling or unitization,
spacing orders or other well permits and other instruments)
which relate to or affect all or any portion of the Subject
Interests;

(xiii) all deposit accounts, contract rights,
operating rights, general intangibles, chattel paper,
documents and instruments whether arising under any of the
foregoing or otherwise, including without limitation, the
Production Sale Contracts and all transmission contracts or
other contracts now or hereafter in effect with respect to the
Pipelines or the Pipeline Assets;

(xiv) all subleases, farmout agreements, assignments
of interests, assignments of operating rights, contracts,
operating agreements, bidding agreements, advance payment
agreements, rights-of-way, surface leases, franchises,
servitudes, privileges, permits, licenses, easements,
tenements, hereditaments, improvements, appurtenances and
benefits now existing or in the future obtained and incident
and appurtenant to any of the foregoing;

(xv) all lease records, well records, production
records and accounting and other records and files which
relate to any of the foregoing, and all maps, data bases,
manuals, information and data which relate to any of the
foregoing, including without limitation engineering,
geological and geophysical data;

(xvi) all income, revenues, rents, profits and
proceeds arising out of the gathering, transportation,
processing or sale of Hydrocarbons through the Pipelines and
other accounts, contract rights, operating rights, general
intangibles,

6

chattel paper, documents, investment property and instruments
arising under any of the foregoing;

(xvii) any liens and security interests in the
Subject Interests in favor of any of the Companies securing
payment of proceeds from the sale of the Subject Minerals
including, but not limited to, those liens and security
interests provided for in Tex. Bus. & Com. Code Ann. Section
9.319 (Tex. UCC) (Vernon 1968), as amended;

(xviii) all other rights, titles and interests of any
of the Companies in, to and under or derived from the Lands,
the Leases, the Rights-of-Way and Franchises, the Production
Sale Contracts and/or other properties described in the
Mortgage;

(xix) any property that may from time to time
hereafter, by delivery or by writing of any kind executed by
or on behalf of any of the Companies, be subjected to the lien
and security interest hereof by any the Companies or by anyone
authorized on and of any of the Companies' behalf, and Secured
Party is hereby authorized to receive the same as additional
security;

(xx) all other property of every nature and kind and
wheresoever situated, now owned or hereafter acquired by any
of the Companies or to which any of the Companies is now or
may hereafter be entitled at law or in equity; and

(xxi) any and all proceeds, returns, rents,
royalties, issues, profits, products, revenues and other
income arising from or by virtue of the sale, lease or other
disposition of, or from any condemnation, eminent domain or
insurance payable with respect to damage, loss or destruction
of, the items described in subparagraphs (i) through (xx)
above;

together with any and all proceeds, products, increases, profits,
substitutions, replacements, renewals, additions, amendments and
accessions of, to and for all of the foregoing property. All the
aforesaid properties, rights and interests which are hereby subjected
to the lien and/or security interest of this instrument, together with
any additions thereto which may be subjected to the lien and/or
security interest of this paragraph (a) by means of supplements hereto
or otherwise shall hereinafter be referred to as the "UCC Collateral."

(b) Each of the Companies also pledges to the Secured Party,
and grants to the Secured Party a security interest in all of the
Companies's right, title and interest in, to and under any and all of
the following described property, rights and interests, in each case,
wherever located, whether now owned or hereafter acquired or arising,
all accessions and additions thereto, all substitutions and
replacements therefor, and all proceeds and products thereof
(collectively, the "Pledged Securities"):

(i) all of the issued and outstanding shares of
common stock of any Subsidiary of any of the Companies
presently existing or hereafter created or acquired (the
"Pledged Subsidiaries") therein set forth;

7

(ii) all other shares of common stock or other equity
securities now or hereafter acquired by any of the Companies
in any manner issued by the Pledged Subsidiaries, and the
certificates representing such securities, and any present or
future options, warrants or other rights to subscribe for or
purchase any property or any notes, bonds, debentures or other
evidences of indebtedness now or hereafter owned or acquired
by any of the Companies in any manner that (A) are at any time
convertible, exchangeable or exercisable into capital stock or
other equity securities of the Pledged Subsidiaries or (B)
have or at any time could by their terms have voting rights
with respect to any matter affecting the Pledged Subsidiaries
and all securities, certificates and instruments representing
or evidencing ownership of any of the property described in
Schedule 2(b) of the Oil and Gas Agreement; and

(iii) all proceeds and products of the foregoing and
distributions thereof or with respect thereto, including
without limitation dividends, distributions, cash, instruments
and other property or securities, now or hereafter at any time
or from time to time received or receivable or otherwise
distributed or distributable in respect of or in exchange for
any or all of the foregoing.

Subject to any Liens in respect of the Jefferies
Lien, pursuant to the terms hereof, each of the Companies has
endorsed, assigned and delivered to the Secured Party or such
other Person that the Secured Party has designated as its
agent to hold for perfection purposes all negotiable or
non-negotiable instruments (including certificated securities)
and chattel paper pledged by it hereunder, together with
instruments of transfer or assignment duly executed in blank
as the Secured Party may have specified. In the event that any
of the Companies shall, after the date of this Agreement,
acquire any other negotiable or non-negotiable instruments
(including certificated securities) or chattel paper to be
pledged by it hereunder, such Companies shall, subject to any
Liens in respect of the Jefferies Lien, forthwith endorse,
assign and deliver the same to the Secured Party, accompanied
by such instruments of transfer or assignment duly executed in
blank as the Secured Party may from time to time specify. To
the extent that any securities are uncertificated, appropriate
book-entry transfers reflecting the pledge of such securities
created hereby have been or, in the case of uncertificated
securities hereafter acquired by the Companies, will at the
time of such acquisition be, duly made for the account of the
Secured Party or one or more nominees of the Secured Party
with the issuer of such securities or other appropriate
book-entry facility or financial intermediary, with the
Secured Party having at all times the right to obtain
definitive certificates (in the Secured Party's name or in the
name of one or more nominees of the Secured Party) where the
issuer customarily or otherwise issues certificates, all to be
held as Collateral hereunder. Each of the Companies hereby
acknowledges that the Secured Party may, in its discretion,
appoint one or more financial institutions to act as the
Secured Party's agent in holding in custodial accounts
instruments or other financial assets, including securities,
in which the Secured Party is granted a security interest
hereunder, including, without limitation, certificates of
deposit and other instruments evidencing short term
obligations.

8

(c) Without limiting the security interest granted
hereby, each of the Companies hereby grants to Secured Party a
limited license in such Company trade names, trademarks and
service marks, together with the Company's goodwill associated
with such trade names, trademarks and servicemarks, for
purposes of allowing Secured Party to use the same in
connection with any foreclosure sale or any other disposition
pursuant to the UCC or this Agreement.

(d) The inclusion of proceeds in this Agreement does
not authorize any of the Companies to sell, dispose of or
otherwise use the Collateral in any manner not specifically
authorized hereby or under the Restructured O&G Agreement.

(e) This Agreement secures the prompt and complete
payment of all Obligations.

Section 3. Representations and Warranties. Each of the
Companies represents and warrants, as of the date hereof, to the
Secured Party as follows:

(a) The chief executive office and principal place of
business of each of the Companies is located at 1300 N. Sam
Houston Parkway East, Suite 320, Houston, Harris County, Texas
77032. Any and all Collateral not delivered to the Secured
Party or its designated agent is and will continue to be
located only in the States of Texas, Louisiana, Alabama,
Mississippi and North Dakota.

(b) the Companies are the legal and beneficial owner
of all of the Collateral free and clear of any lien, security
interest, charge or encumbrance of any kind or nature, except
for the lien and security interest created hereby, Permitted
Liens and the Jefferies Lien, and none of the Companies has
made any other pledge, assignment, mortgage, hypothecation or
transfer of the Collateral except as permitted hereunder or
under the Restructured O&G Agreement. Except for Permitted
Liens, the Collateral taken as a whole is free from any
material credit, deduction, allowance, defense, dispute,
setoff or counterclaim and there is no material extension or
indulgence with respect thereto. The Pledged Securities are
not subject to any put, call, option or other right in favor
of any other person whatsoever.

(c) The Pledged Securities are have been duly
authorized and validly issued and non-assessable.

(i) This Agreement has been duly executed
and delivered by each of the Companies and creates a
valid security interest in, and lien on, the
Collateral securing the payment of the Obligations.
Upon the delivery of physical certificates evidencing
the Pledged Securities to the Secured Party or its
designated agent and the making of the filings and
the taking of all other actions necessary, if any, to
perfect the security interests created hereby,
including, without limitation, those actions
specified in Section 2(b) and Section 4, the security
interests created by this Agreement will be duly
perfected security interests subject to no equal or
prior lien, security interest or encumbrance of any
kind or nature other than the Jefferies Lien.
Notwithstanding anything to the contrary in this
Section, pursuant to the Confirmation Order all liens
granted

9

hereunder shall, for all purposes, be valid,
perfected, enforceable, non-avoidable and effective
as of the Effective Date without any further action
by the Thornwood or by the Debtors and without the
execution, filing or recordation of any financing
statement, security agreement, mortgage or other
document.

(d) Each of the Companies has the requisite corporate
power and authority to pledge the Collateral in the manner
hereby done or contemplated and to defend its title thereto
against the lawful claims of all persons whomsoever.

(e) Neither the execution and delivery of this
Agreement by any of the Companies, the performance by any of
the Companies of its obligations hereunder, nor the
transactions herein contemplated will (i) violate any of the
Companies' charter or bylaws, (ii) violate the terms of any
agreement, indenture, mortgage, deed of trust, equipment
lease, instrument or other document to which any of the
Companies is a party, (iii) violate any law, order, rule or
regulation applicable to any of the Company of any court or
any government, regulatory body or administrative agency or
other governmental body having jurisdiction over any Company
or its properties, or (iv) result in or require the creation
or imposition of any lien (other than the lien contemplated
hereby), upon or with respect to any of the property now owned
or hereafter acquired by any of the Companies, which violation
or conflict would have a material adverse effect on the
financial condition, business, assets or liabilities of any of
the Companies or on the value of the Collateral or a material
adverse effect on the security interests hereunder.

(f) The Pledged Securities includes the issued and
outstanding shares of Common Stock of the Pledged Subsidiaries
and as of the date of execution hereof, there are no
outstanding options, warrants or other rights to subscribe for
or purchase any property of the Companies or the Pledged
Subsidiaries or any notes, bonds, debentures or other
evidences of indebtedness that (i) are at any time convertible
into capital stock of the Pledged Subsidiaries or (ii) have or
at any time could by their terms have voting rights with
respect to any matters affecting the Pledged Subsidiaries.

(g) No consent or approval which has not been
obtained prior to the date hereof of any other person or
entity and no authorization, approval or other action (other
than delivery of physical certificates evidencing the Pledged
Securities) by, and no notice to or filing with any
governmental body (other than UCC filings), regulatory
authority or securities exchange, was or is necessary as a
condition to the validity of the pledge hereunder of the
Collateral, and such pledge is effective to vest in the
Secured Party the rights of the Secured Party in the
Collateral as set forth herein. There are no restrictions on
the transferability of any of the Collateral transferred or
delivered by the Companies hereunder or, except for
restrictions related to federal and state securities laws
governing the sale of "restricted stock" or "control stock,"
with respect to the foreclosure, transfer or disposition
thereof by the Secured Party.

(h) As of the date hereof, GB Processing and GB
Pipeline are the only Material Subsidiaries of the Companies.

10

Section 4. Covenants. During the term of this Agreement and
until all the Obligations have been fully and finally paid and
discharged in full, each the Companies covenants and agrees with the
Secured Party that:

(a) Except as permitted by the Restructured O&G
Agreement or in the ordinary course of business, none of the
Companies will make any compromise or settlement with respect
to the Collateral without notice to or consent of the Secured
Party.

(b) Subject to the Jefferies Lien and the Jefferies
Documentation, each of the Companies shall deliver to the
Secured Party or its designated agent concurrently with the
execution of this Agreement or, to the extent acquired
subsequent to the date of execution hereof, including without
limitation Pledged Securities issued by a newly created or
acquired Subsidiary, immediately upon such Companies'
acquisition thereof: (i) all certificates and instruments
representing the Pledged Securities, and (ii) all certificates
and instruments representing each other item of Collateral
(including all certificates, instruments and notes
representing any such UCC Collateral). Any and all Pledged
Securities delivered to the Secured Party or its designated
agent shall be accompanied by undated duly executed powers in
blank and by such other instruments of transfer or documents
as the Secured Party may reasonably request. The Secured Party
may hold the certificates representing the Pledged Securities
delivered to it in its own name or in the name of its nominee,
all in form and substance satisfactory to the Secured Party.

(c) From time to time, each of the Companies shall,
at its own expense, promptly give, execute, deliver, file
and/or otherwise formalize any such notice, statement,
instrument, document, agreement or other papers, and do all
such other acts and things, as may be necessary or desirable,
or as the Secured Party may reasonably request, in order to
create, evidence, preserve, perfect, validate or continue any
lien or security interest created pursuant to this Agreement
or to enable the Secured Party to exercise or enforce its
rights hereunder with respect to such lien or security
interest, or otherwise further to effect the purposes of this
Agreement. Without limiting the generality of the foregoing,
each of the Companies shall, at any time or from time to time
upon the request of the Secured Party and at the Companies'
own expense, execute, acknowledge, witness, deliver, file
and/or record such financing and continuation statements,
notices, additional assignments and other documents or
instruments (all of which shall be in form and substance
satisfactory to the Secured Party and its counsel) as the
Secured Party may from time to time reasonably request for the
perfection of the liens and security interests created hereby.

(d) Each of the Companies shall promptly notify the
Secured Party (i) of any material changes in any fact or
circumstance represented or warranted by any of the Companies
with respect to any material portion of the Collateral, (ii)
of any material impairment of the Collateral and (iii) of any
claim, action or proceeding affecting title to all or any of
the Collateral.

(e) Except for the liens and security interests
created by this Agreement and the Permitted Liens in the
Collateral, each of the Companies shall at its own expense

11

defend the Collateral against any and all liens, claims,
security interests and other encumbrances or interests,
howsoever arising and shall maintain and preserve the security
interest granted hereunder with respect to the Collateral as
long as this Agreement shall remain in full force and effect.
None of the Companies shall make any other pledge, assignment,
mortgage, hypothecation or transfer of the Collateral except
as permitted hereunder or under the Restructured O&G
Agreement.

(f) Each of the Companies shall at all times keep
accurate and complete records with respect to the Collateral,
including, without limitation, records of all payments made,
credit granted and proceeds received in connection therewith.

(g) None of the Companies shall relocate its
principal place of business or chief executive office to a
county or state other than that specified in Section 3(a) of
this Agreement unless such Company gives 30 days' prior
written notice to the Secured Party, which notice shall
specify the county and state into which such relocation is to
be made. The Collateral, to the extent not delivered to the
Secured Party pursuant to Section 2, will be kept at those
locations listed on the Perfection Certificate delivered to
the Secured Party herewith in the form attached as Exhibit A
hereto and none of the Companies will remove the Collateral
from such locations, without providing at least 30 days' prior
written notice to the Secured Party.

(h) Each of the Companies will keep the Collateral in
good order and repair, except in situations where not to do so
would not be material, and will not use the same in violation
of law or any policy of insurance thereon. The Secured Party,
or its designee, may inspect the Collateral at any reasonable
time, wherever located.

(i) The Secured Party, or its representative, shall
at all times have full and free access during normal business
hours to all of the books, correspondence and records of each
of the Companies relating to the Collateral (other than
information that is privileged and confidential) and the
Secured Party and its representatives may examine the same,
make abstracts therefrom and make photocopies thereof, and the
Companies agrees to render to the Secured Party, at the
Companies' cost and expense, such clerical and other
assistance as may be reasonably requested by the Secured Party
with regard thereto.

(j) The Companies shall not permit any of the Pledged
Subsidiaries to issue to the Companies any securities of the
type required to be pledged hereunder unless such securities
are promptly pledged and delivered hereunder to the Secured
Party or its designated agent in accordance with Section 2(b).

(k) If, while this Agreement is in effect, any stock
dividend, stock split, reclassification, readjustment,
reorganization, merger, consolidation, exchange offer, tender
offer or other change in the capital structure, including the
creation of any subscription or other rights relating to the
Pledged Securities, is declared or made, or proposed to be
declared or made, by any of the Pledged Subsidiaries or any
other issuer of the Collateral, all substituted and additional
securities or interest issued with respect to the Collateral
and evidenced by certificates shall be endorsed in blank by
the applicable Companies promptly upon receipt thereof or
otherwise appropriately transferred to the

12

Secured Party in negotiable form, and all certificates or
instruments evidencing such securities shall be delivered to
the Secured Party to be held under the terms of this Agreement
in the same manner as, and as a part of, the Collateral. All
Pledged Securities shall be evidenced by one or more
certificates. Any securities that may be issued upon exercise
of any subscription or other rights relating to the Pledged
Securities shall be endorsed in blank and delivered to the
Secured Party with any necessary powers.

Section 5. Powers of the Secured Party.

(a) Each of the Companies hereby irrevocably
designates and appoints the Secured Party as its
attorney-in-fact, with full power of substitution, for the
purposes of carrying out the provisions of this Agreement and
taking any action and executing any instrument, including,
without limitation, any financing statement or continuation
statement, and taking any other action to maintain the
validity, perfection, priority and enforcement of the security
interest intended to be created hereunder, that the Secured
Party may reasonably deem necessary or advisable to accomplish
the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest.

(b) Without limiting the generality of Section 5(a)
hereof, each of the Companies hereby irrevocably authorizes
and empowers the Secured Party, upon the occurrence and during
the continuation of any Event of Default, at the expense of
such Companies, either in the Secured Party's own name or in
the name of any Companies, at any time and from time to time:

(i) to ask, demand, receive, issue a receipt
for, give acquittance for, settle and compromise any
and all monies which may be or become due or payable
or remain unpaid at any time or times to any of the
Companies, and any and all other property which may
be or become deliverable at any time or times to any
of the Companies, under or with respect to the
Collateral;

(ii) to endorse any drafts, checks, orders
or other instruments for the payment of money payable
to any of the Companies on account of the Collateral
(including any such draft, check, order or instrument
issued by any insurance company payable jointly to
any of the Companies and the Secured Party); and

(iii) to settle, compromise, prosecute or
defend any action, claim or proceeding, or take any
other action, all either in its own name or in the
name of any of the Companies or otherwise, which the
Secured Party may deem to be necessary or advisable
for the purpose of exercising and enforcing its
powers and rights under this Agreement or in
furtherance of the purposes hereof, including any
action which by the terms of this Agreement is to be
taken by any of the Companies.

(c) Nothing in this Agreement shall be construed as
requiring or obligating the Secured Party to make any
commitment or to make any inquiry as to the nature or
sufficiency of any payment received by it, or to present or
file any claim or notice, or to take any other action with
respect to any of the Collateral or any part thereof or the
amounts due or to become due in respect thereof or any
property covered thereby, or to

13

collect or enforce the payment of any amounts assigned to it
or to which it may otherwise be entitled hereunder at any time
or times other than to account for amounts or Collateral
received.

(d) The Secured Party shall be entitled at any time
to file this Agreement, or a carbon, photographic or any other
reproduction of this Agreement, as a financing statement, but
the failure of the Secured Party to do so shall not impair the
validity or enforceability of this Agreement. The Secured
Party shall have no duty to comply with any recording, filing
or other legal requirements necessary to establish or maintain
the validity, priority or enforceability of, or the Secured
Party's rights in or to, any of the Collateral.

(e) In its discretion, the Secured Party may
discharge taxes and other encumbrances at any time levied or
placed on any of the Collateral, make repairs thereto and pay
any necessary filing fees. Each of the Companies agrees to
reimburse the Secured Party on demand for any and all
reasonable expenditures so made with interest on unpaid
amounts at the maximum rate permitted by law. The Secured
Party shall have no obligation to any of the Companies to make
any such expenditures, nor shall the making thereof relieve
any of the Companies of any default.

(f) Anything herein to the contrary notwithstanding,
each of the Companies shall remain liable under each contract
or agreement comprised in the Collateral to be observed or
performed by such Companies thereunder. The Secured Party
shall not have any obligation or liability under any such
contract or agreement by reason of or arising out of this
Agreement or the receipt by the Secured Party of any payment
relating to any of the Collateral, nor shall the Secured Party
be obligated in any manner to perform any of the obligations
of any of the Companies under or pursuant to any such contract
or agreement, to make inquiry as to the nature or sufficiency
of any payment received by the Secured Party in respect of the
Collateral or as to the sufficiency of any performance by any
party under any such contract or agreement, to present or file
any claim, to take any action to enforce any performance or to
collect the payment of any amounts which may have been
assigned to the Secured Party or to which the Secured Party
may be entitled at any time or times other than to account for
amounts or Collateral received, and no action taken or omitted
shall give rise to any defense, counterclaim or right of
action against the Secured Party, unless the Secured Party's
actions are taken or omitted to be taken with gross negligence
or bad faith or constitute willful misconduct. The Secured
Party's sole duty with respect to the custody, safe keeping
and physical preservation of the Collateral in its possession,
under Section 9-207 of the UCC or otherwise, shall be to deal
with such Collateral in the same manner as the Secured Party
deals with similar property for its own account.

(g) If an Event of Default has occurred and is
continuing, the Secured Party may at any time, at its option,
transfer to itself or any nominee any securities constituting
the Pledged Securities, receive any income thereon and hold
such income as additional Collateral or apply it to the
Obligations. Regardless of whether any Obligations are due,
the Secured Party may demand, sue for, collect, or make any
settlement or compromise, which it deems desirable with
respect to the Collateral. Regardless of the adequacy of

14

Collateral or any other security for the Obligations, any
deposits or other sums at any time credited by or due from the
Secured Party to any of the Companies may at any time be
applied to or setoff against any of the Obligations.

(h) If an Event of Default has occurred and is
continuing, the Secured Party shall have all of the rights
with respect to the UCC Collateral as may be available to
secured parties under the UCC.

(i) If an Event of Default shall have occurred and be
continuing, each of the Companies shall, at the request of the
Secured Party, notify obligors on chattel paper and general
intangibles of the Companies and obligors on instruments for
which any of the Companies is an obligee of the security
interest of the Secured Party in any chattel paper, general
intangible or instrument and that payment thereof is to be
made directly to the Secured Party or to any financial
institution designated by the Secured Party as the Secured
Party's agent therefor, and the Secured Party may itself, if
an Event of Default shall have occurred and be continuing,
without notice to or demand upon the Companies, so notify said
obligors. After the making of such a request or the giving of
any such notification, each of the Companies shall hold any
proceeds of collection of chattel paper, general intangibles
and instruments received by such Companies as trustee for the
Secured Party without commingling the same with other funds of
such Companies and shall turn the same over to the Secured
Party in the identical form received, together with any
necessary endorsements or assignments. The Secured Party shall
apply the proceeds of collection of chattel paper, general
intangibles and instruments received by the Secured Party to
the Obligations, such proceeds to be immediately entered after
final payment in cash of the items giving rise to them.

Section 6. Voting Rights, Dividends, Etc.

(a) Until an Event of Default shall have occurred and
be continuing:

(i) except as otherwise provided in this
Agreement, each of the Companies shall be entitled to
exercise any and all voting or consensual rights and
powers, including subscription rights, in relation to
the Pledged Securities; provided, however, that no
vote shall be cast or consent, waiver or ratification
given or action taken which would materially impair
the securities or the value thereof or violate any
provision of this Agreement, the Restructured O&G
Agreement or any other ancillary document;

(ii) except as otherwise provided in this
Agreement, each of the Companies shall be entitled to
receive and retain any and all dividends,
distributions or other payments in respect of the
Pledged Securities and the Secured Party, upon
receipt of any of the foregoing, shall promptly pay
or distribute the same to the applicable Companies,
and, to the extent so permitted, any distributions
received by such Companies and transferred to other
persons shall pass free and clear of the lien and
security interest hereof; and

(iii) the Secured Party shall execute and
deliver to each of the Companies or cause to be
executed and delivered to such Companies, all such

15

proxies, powers of attorney, dividend orders and
other instruments as such Companies may reasonably
request for the purpose of enabling it to exercise
the voting or consensual rights and powers which such
Companies is entitled to exercise pursuant to the
foregoing Section 6(a)(i) or to receive the
dividends, distributions or other payments which such
Companies is authorized to retain pursuant to the
foregoing Section 6(a)(ii).

(b) Upon the occurrence and during the continuance of
an Event of Default, all rights of each of the Companies to
exercise the voting or consensual rights and powers which it
would otherwise be entitled to exercise pursuant to Section
6(a)(i) and to receive the dividends, distributions and other
payments which the Pledgor would otherwise be authorized to
receive and retain pursuant to Section 6(a)(ii) shall
automatically cease, and all such rights shall thereupon
become vested in the Secured Party, which shall then have the
sole and exclusive right and authority to exercise, in its
sole discretion, all such voting and consensual rights and
powers and to receive and retain as Collateral all such
dividends, distributions and other payments. Without limiting
the foregoing, in such event the Secured Party may exercise
all voting and corporate rights at any meeting of any
corporation issuing any such securities and any and all rights
of conversion, exchange, subscription or any other rights,
privileges or options pertaining to any such securities as if
it were the absolute owner thereof, including, without
limitation, the rights to exchange at its discretion, any and
all such securities upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any
corporation issuing any such securities or upon the exercise
by any such issuer or the Secured Party of any right,
privilege or option pertaining to any such securities, and, in
connection therewith, to deposit and deliver any and all
securities with any committee, depository, transfer agent,
registrar or other designated agency upon such terms and
conditions as it may determine, all without liability except
to account for the property actually received by it, but the
Secured Party shall have no duty to exercise any of the
aforesaid rights, privileges or options and the Secured Party
shall not be responsible for any failure to do so or delay in
so doing.

Section 7. Default.

(a) It shall constitute a Default or an Event of
Default under this Agreement if a "Default" or an "Event of
Default" shall occur under the Restructured O&G Agreement.

(b) If an Event of Default shall have occurred and is
continuing and if the Obligations are accelerated under the
provisions of the Restructured O&G Agreement, in addition to
any other rights and remedies that may be available to the
Secured Party under the UCC or the Restructured O&G Agreement
or under Section 5 of this Agreement or otherwise under this
Agreement or at law, the Secured Party shall also have the
following rights and powers:

(i) The Secured Party may, without being
required to give any notice except as hereinafter
provided, sell the Collateral, or any part thereof,
at public or private sale, for cash, upon credit or
for future delivery and at such price or prices

16

as the Secured Party deems satisfactory, and the
Secured Party and/or its collateral agent may be the
purchaser of any or all of the Collateral so sold and
thereafter hold the same absolutely free from any
right or claim of whatsoever kind, and the
Obligations or any portion of the Obligations may be
applied as a credit against the purchase price.

(ii) Upon any such sale, the Secured Party
shall have the right to deliver, assign and transfer
to the purchaser thereof the Collateral so sold. Each
purchaser at any such sale shall hold the property
sold absolutely free from any claim or right of
whatsoever kind by or on behalf of any of the
Companies, including any equity or rights of
redemption of any of the Companies, and each of the
Companies hereby specifically waives, to the full
extent permitted by applicable law, all rights of
redemption, stay or appraisal which it has or may
have under any rule or law or statute now existing or
hereafter adopted.

(iii) The Secured Party shall give each of
the Companies ten (10) business days' written notice
(which each of the Companies agrees is reasonable
notification within the meaning of Section 9-611 of
the UCC) of its intention to make any such public or
private sale. Such notice, in case of public sale,
shall state the time and place fixed for such sale
and, in case of a private sale, shall state the date
after which such sale is to be made.

(iv) Any such public sale shall be held at
such time or times within ordinary business hours and
at such places as the Secured Party may fix in the
notices of such sale. At any such sale the Collateral
may be sold in one lot as an entirety or in separate
parcels, as the Secured Party may, in its sole
discretion, determine.

(v) The Secured Party shall not be obligated
to make any sale of the Collateral of any part
thereof if it shall determine not to do so,
regardless of the fact that notice of sale of the
Collateral may have been given. The Secured Party
may, without notice or publication, adjourn any
public or private sale or cause the same to be
adjourned from time to time by announcement at the
time and place fixed for the sale, and such sale may,
without further notice, be made at any time or place
to which the same shall be so adjourned.

(vi) In case of any sale of all or any part
of the Collateral on credit or for future delivery,
the Collateral so sold may be retained by the Secured
Party until the selling price is paid by the
purchaser thereof, but the Secured Party shall not
incur any liability in case of the failure of such
purchaser to take up and pay for the Collateral so
sold and, in case of any such failure, such
Collateral may again be sold upon like notice.

(vii) The Secured Party, instead of
exercising the power of sale herein conferred upon
it, may proceed by a suit or suits at law or in
equity to exercise its remedies regarding the
Collateral and sell the Collateral, or any portion
thereof, under a judgment or decree of a court or
courts of competent jurisdiction.

17

(viii) Each of the Companies agrees that if
any Event of Default shall have occurred and be
continuing, then the Secured Party shall have the
right to take possession of the Collateral, and for
that purpose the Secured Party may, so far as any of
the Companies can give authority therefor, enter upon
any premises on which the Collateral may be situated
and remove the same therefrom with or without notice
or process of law. Each of the Companies waives any
and all rights that it may have to a judicial hearing
in advance of the enforcement of any of the Secured
Party's rights hereunder, including, without
limitation, its right following an Event of Default
to take immediate possession of the Collateral and to
exercise its rights with respect thereto.

(ix) If under mandatory requirements of
applicable law, the Secured Party shall be required
to make disposition of the Collateral within a period
of time that does not permit the giving of notice to
the Companies as hereinbefore provided, the Secured
Party need give each of the Companies only such
notice of disposition as shall be reasonably
practicable in view of such mandatory requirements of
law.

(x) The Secured Party may instruct the
obligor or obligors on any agreement, instrument or
other obligation constituting the Collateral to make
any payment or render any performance required by the
terms of such agreement, instrument or obligation
directly to the Secured Party or its designee.

(c) The Secured Party shall incur no liability as a
result of the sale of the Collateral, or any part thereof, at
any private sale other than for its own gross negligence,
willful misconduct or bad faith. Each of the Companies hereby
waives, to the maximum extent permitted by applicable law, any
claims against the Secured Party arising by reason of the fact
that the price at which the Collateral may have been sold at
such private sale was less than the price which might have
been obtained at a public sale or was less than the aggregate
amount of the Obligations, even if the Secured Party accepts
the first offer received and does not offer such Collateral to
more than one offeree.

(d) The Secured Party shall not be obligated to
pursue or exhaust its rights and remedies against any
particular Collateral or other security for the Obligations
before pursuing or enforcing its rights and remedies against
any other Collateral or other security for the Obligations.

(e) To the extent permitted by law, each of the
Companies hereby waives (i) any rights to require the Secured
Party to proceed first against any other Person, to exhaust
its rights in the Collateral or other security for the
Obligations or to pursue any other right that the Secured
Party might have, (ii) with respect to the Note, presentment
and demand for payment, protest, notice of protest and
nonpayment, notice of dishonor, notice of the intention to
accelerate and notice of acceleration (except as otherwise set
forth in the Restructured O&G Agreement), and (iii) all rights
of marshaling in respect of any and all of the Collateral.

(f) Without precluding any other methods of sale,
each of the Companies acknowledges that the sale of the
Collateral shall have been made in a commercially

18

reasonable manner if conducted in conformity with reasonable
commercial practices of institutional lenders disposing of
similar property. The Secured Party shall not be liable for
any depreciation in the value of the Collateral.

(g) Each of the Companies agrees that its obligation
to deliver the Collateral is of the essence of this Agreement
and that accordingly, upon application to a court of equity
having jurisdiction, the Secured Party shall be entitled to a
decree requiring specific performance by the Companies of such
obligation.

(h) Remedies of the Secured Party are cumulative and
the exercise of any one or more of the remedies provided
herein shall not be construed as a waiver of any of the other
remedies of the Secured Party.

(i) If an Event of Default shall have occurred and be
continuing, the proceeds of any sale of or other realization
upon all or any part of the Collateral and any other amounts
held by the Secured Party under this Agreement shall be
applied by the Secured Party as provided in the Restructured
O&G Agreement.

Any amounts remaining after such applications and the
payment in full of the Note with respect to the Obligations
shall be remitted to the Companies, its successors or assigns,
or as a court of competent jurisdiction may otherwise direct.

Section 8. General Provisions.

(a) Continuing Security Interest; Binding Effect.
This Agreement shall create a continuing security interest in
the Collateral and shall (i) remain in full force and effect
until termination of the obligations of the Companies under
the Restructured O&G Agreement and the indefeasible payment in
full thereafter of the Obligations; (ii) be binding upon each
of the Companies and its successors and assigns; and (iii)
inure to the benefit of the Secured Party and its successors,
transferees and assigns. Without limiting the generality of
the foregoing clause (iii), the Secured Party may assign or
otherwise transfer any of its rights under this Agreement to
any other Person, and such Person shall thereupon become
vested with all the benefits in respect thereof granted herein
or otherwise to the Secured Party. Upon the termination of the
obligations of the Secured Party under the Restructured O&G
Agreement and the indefeasible payment in full thereafter of
the Obligations, each of the Companies shall be entitled to
the return, upon its request and at its expense, of such of
the Collateral as is in the Secured Party's possession and as
shall not have been sold or otherwise disposed of pursuant to
the terms hereof.

(b) Security Interest Absolute. The lien and security
interest created hereunder and the Companies' obligations
hereunder and the Secured Party's rights hereunder shall not
be released, diminished, impaired or adversely affected by the
occurrence of any one or more of the following events:

(i) The taking or accepting of any other
security or assurance for any or all of the
Obligations;

19

(ii) Any release, surrender, exchange,
subordination or loss of any security or assurance at
any time existing in connection with any or all of
the Obligations;

(iii) The modification of, amendment to, or
waiver of compliance with any terms of the
Restructured O&G Agreement or the Note;

(iv) Any renewal, extension and/or
rearrangement of the payment of any or all of the
Obligations or any statement, indulgence, forbearance
or compromise that may be granted or given by the
Secured Party to any of the Companies or any other
Person;

(v) any neglect, delay, omission, failure or
refusal of the Secured Party to take or prosecute any
action in connection with any agreement, document or
other instrument evidencing, securing or assuring the
payment of any or all of the Obligations;

(vi) the illegality, invalidity or
unenforceability of all or any part of the
Restructured O&G Agreement or the Note; or

(vii) any other circumstance (other than
payment in full of the Obligations) that might
otherwise constitute a defense available to, or a
discharge of, the Companies or any party to any
document in respect of the Obligations.

(c) Amendments. This Agreement or any term hereof may
be amended or changed only by an instrument in writing
executed jointly by each of the Companies and the Secured
Party and in accordance with the Restructured O&G Agreement.

(d) Remedies Cumulative. Each right, power and remedy
herein specifically granted to the Secured Party or otherwise
available to it or now or hereafter existing in law or in
equity shall be cumulative and concurrent, and shall be in
addition to every other right, power and remedy herein
specifically given or now or hereafter existing at law, in
equity, or otherwise (including, without limitation, all
rights, powers and remedies granted to a secured party under
the UCC), and each such right, power and remedy, whether
specifically granted herein or otherwise existing, may be
exercised at any time and from time to time as often and in
such order as may be deemed expedient by the Secured Party in
its sole and complete discretion. The provisions of this
Agreement may only be waived by an instrument in writing
signed by the Secured Party, and no failure on the part of the
Secured Party to exercise, and no delay in exercising, and no
course of dealing with respect to, any such right, power or
remedy, shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right, power or remedy
preclude any other or further exercise thereof or the exercise
of any other right. No notice to or demand on any of the
Companies hereunder shall, of itself, entitle any of the
Companies to any other or further notice or demand in the same
or similar circumstances.

(e) Assignment. Neither this Agreement nor any
interest herein or in the Collateral, or any part thereof, may
be assigned by any of the Companies without the

20

prior written consent of the Secured Party, except as
expressly permitted herein or in the Restructured O&G
Agreement.

(f) Headings. The descriptive headings of the several
sections of this Agreement are inserted for convenience only
and shall not control or affect the meaning or construction of
any of the provisions hereof.

(g) Severability. Any provision of this Agreement
that is prohibited or unenforceable in any jurisdiction shall,
as to such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity of
enforceability or such provision in any other jurisdiction.

(h) Survival. All representations and warranties
contained herein, in the Restructured O&G Agreement or made in
writing by any of the Companies in connection herewith or
therewith, shall survive the execution and delivery of this
Agreement, the Restructured O&G Agreement and any documents
executed in connection herewith or therewith.

(i) Counterparts; Facsimiles. This Agreement may be
executed in any number of counterparts and by different
parties in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original, but
all of which when taken together shall constitute one and the
same instrument. A complete set of counterparts shall be
lodged with the Secured Party. Any signature delivered by fax
shall be deemed an original signature hereto.

(j) Waiver. To the extent permitted by applicable law
each of the Companies hereby waives promptness, diligence,
notice of acceptance and any other notice with respect to any
of the Restructured O&G Agreement obligations and this
Agreement and any requirement that the Secured Party protect,
secure, perfect or insure any security interest or any
property subject thereto or exhaust any right or take any
action against any of the Companies or any other person or
entity; provided however, that the Secured Party shall in any
event take such care in the handling of any Collateral in its
possession as it takes with respect to its own property of a
similar nature in its possession.

(k) Notices. Any notices or other communications
required or permitted hereunder shall be made in the manner
provided in the Restructured O&G Agreement.

(l) Conflicting Terms. In the event of any conflict
or inconsistency between the terms, covenants, conditions and
provisions set forth in this Agreement and the terms,
covenants, conditions and provisions set forth in the
Restructured O&G Agreement, the terms, covenants, conditions
and provisions of the Restructured O&G Agreement shall
prevail.

(m) Governing Law. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW
EXCEPT SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.

21

EACH OF THE COMPANIES HEREBY IRREVOCABLY SUBMITS TO THE
JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE
BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL
COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW
YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR
ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. EACH OF
THE COMPANIES IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY
OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. EACH OF THE COMPANIES IRREVOCABLY
CONSENTS, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER
APPLICABLE LAW, TO THE SERVICE OF PROCESS OF ANY OF THE
AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL,
POSTAGE PREPAID, TO THE COMPANIES AT ITS SAID ADDRESS, SUCH
SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING.
NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE SECURED PARTY TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST ANY OF
THE COMPANIES IN ANY OTHER JURISDICTION.

[SIGNATURE PAGE FOLLOWS]

22

IN WITNESS WHEREOF, the Companies and the Secured Party have executed
this Amended and Restated Agreement as of the date first above written.

TRANSTEXAS GAS CORPORATION

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

GALVESTON BAY PIPELINE COMPANY

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

GALVESTON BAY PROCESSING CORPORATION

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

THORNWOOD ASSOCIATES LP
By: Barberry Corp., General Partner

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

EXHIBIT A (PERFECTION CERTIFICATE) - to be provided by the Debtors

SCHEDULE 1(a) - to be provided by the Debtors

EXHIBIT 99.7

TERM LOAN AND SECURITY AGREEMENT
[EXIT FACILITY]

among

PANACO, INC.
Borrower

MID RIVER LLC,
Administrative Agent

and

THE LENDERS NAMED HEREIN,
Lenders

$38,000,000

DATED AS OF NOVEMBER 16, 2004

TABLE OF CONTENTS

Page

SECTION 1.      DEFINITIONS AND TERMS......................................................................       1
1.1     Definitions.......................................................................................       1
1.2     Number and Gender of Words; Other References......................................................      16
1.3     Accounting Principles.............................................................................      16
SECTION 2.      TERM LOAN FACILITY.........................................................................      17
SECTION 3.      TERMS OF PAYMENT...........................................................................      17
3.1     Loan Accounts, Notes, and Payments................................................................      17
3.2     Payments..........................................................................................      18
3.3     Prepayments.......................................................................................      18
3.4     Interest Accrual..................................................................................      18
3.5     Post-Default Rate.................................................................................      18
3.6     Interest Recapture................................................................................      18
3.7     Interest Calculations.............................................................................      19
3.8     Maximum Rate......................................................................................      19
3.9     Application of Payments...........................................................................      19
3.10    Sharing of Payments, Etc. ........................................................................      20
3.11    Offset............................................................................................      20
3.12    Collection of Accounts............................................................................      20
3.13    Crediting Payments; Application of Collections....................................................      21
SECTION 4.      TAXES......................................................................................      21
4.1     General...........................................................................................      21
4.2     Stamp and Documentary Taxes.......................................................................      22
4.3     Indemnification for Taxes.........................................................................      22
4.4     Changes in Applicable Lending Office..............................................................      22
4.5     Survival..........................................................................................      22
SECTION 5.      SECURITY...................................................................................      22
5.1     Collateral........................................................................................      22
5.2     Grant of Security Interest in Personal Property Collateral........................................      22
5.3     Negotiable Collateral and Chattel Paper...........................................................      23
5.4     Delivery of Additional Documentation Required.....................................................      24
5.5     Power of Attorney.................................................................................      24
5.6     Right to Verify Accounts..........................................................................      25
5.7     Right

to Inspect Properties and Books and Records; Communication with Accountants.................      25
5.8     Right to Inspect Collateral.......................................................................      25
5.9     Right to Require Collateral Appraisals............................................................      25
5.10    Control Agreements................................................................................      25
5.11    Grant of License to Use Proprietary Rights........................................................      26
5.12    Commercial Tort Claims............................................................................      26
5.13    Letters in Lieu/Power of Attorney.................................................................      26
5.14    Assignment of Runs................................................................................      27
SECTION 6.      CONDITIONS PRECEDENT TO CLOSING............................................................      27
SECTION 7.      REPRESENTATIONS AND WARRANTIES.............................................................      27
7.1     Organization, Powers, Qualification, Good Standing, Business, and Subsidiaries....................      27
7.2     Authorization of Borrowing, etc. .................................................................      28
7.3     Collateral and Security Interests.................................................................      28
7.4     Financial Condition...............................................................................      30
7.5     Title to Collateral...............................................................................      30

i

7.6     Proved Reserves; Ownership of Oil and Gas Properties..............................................      31
7.7     Operations of Oil and Gas Properties..............................................................      32
7.8     Maintenance of Properties.........................................................................      32
7.9     Marketing of Production...........................................................................      32
7.10    Leases............................................................................................      33
7.11    Non-Consent Operations............................................................................      33
7.12    Condition of Equipment............................................................................      33
7.13    Wells.............................................................................................      33
7.14    Swap Agreements...................................................................................      33
7.15    Hedging Agreement.................................................................................      33
7.16    Compliance with the Law...........................................................................      33
7.17    Litigation; Adverse Facts.........................................................................      34
7.18    Payment of Taxes..................................................................................      34
7.19    Performance of Agreements; Materially Adverse Agreements..........................................      34
7.20    Governmental Regulation...........................................................................      34
7.21    Securities Activities.............................................................................      34
7.22    Employee Plans....................................................................................      35
7.23    Environmental Protection..........................................................................      35
7.24    Disclosure........................................................................................      36
7.25    Purpose of Credit Facility........................................................................      36
SECTION 8.      AFFIRMATIVE COVENANTS......................................................................      37
8.1     Financial Statements and Other Reports............................................................      37
8.2     Collateral Reporting..............................................................................      40
8.3     Corporate Existence...............................................................................      41
8.4     Payment of Taxes and Claims; Tax Consolidation....................................................      41
8.5     Operation and Maintenance of Properties; Insurance................................................      41
8.6     Inspection; Lender Meeting........................................................................      42
8.7     Compliance with Laws, etc. .......................................................................      42
8.8     Borrower's Remedial Action Regarding Hazardous Materials..........................................      44
8.9     Oil and Gas Property Title Information............................................................      44
8.10    Additional Collateral.............................................................................      44
8.11    Payment of Obligation; Leases.....................................................................      45
8.12    Further Assurances................................................................................      45
8.13    Location of Inventory and Equipment...............................................................      45
8.14    Use of Proceeds...................................................................................      45
8.15    Reorganization Plan...............................................................................      45
SECTION 9.      NEGATIVE COVENANTS.........................................................................      45
9.1     Indebtedness......................................................................................      46
9.2     Prohibition on Liens..............................................................................      46
9.3     Investments.......................................................................................      46
9.4     Change in Location of Chief Executive Office; Inventory and Equipment with Bailees................      47
9.5     Restriction on Fundamental Changes; Asset Sales...................................................      47
9.6     Sales and Lease-Backs.............................................................................      47
9.7     Sale or Discount of Receivables...................................................................      47
9.8     Transactions with Affiliates......................................................................      47
9.9     Distributions; Repurchases of Capital Stock.......................................................      48
9.10    Conduct of Business...............................................................................      48
9.11    Amendments or Waivers of Agreements...............................................................      48
9.12    Gas Imbalances, Take-or-Pay or Other Prepayments..................................................      48
9.13    Swap Agreements...................................................................................      48
9.14    No Prohibited Transactions Under ERISA............................................................      49

ii

9.15    Maintenance of Proprietary Rights.................................................................      49
SECTION 10.     DEFAULT....................................................................................      50
10.1    Failure to Make Payments When Due.................................................................      50
10.2    Default in Other Agreements.......................................................................      50
10.3    Breach of Certain Covenants.......................................................................      50
10.4    Breach of Warranty................................................................................      50
10.5    Other Defaults Under Loan Documents...............................................................      50
10.6    Involuntary Bankruptcy; Appointment of Receiver, etc..............................................      50
10.7    Voluntary Bankruptcy, Appointment of Receiver, etc................................................      50
10.8    Judgments and Attachments.........................................................................      51
10.9    Dissolution.......................................................................................      51
10.10   Employee Plans....................................................................................      51
10.11   Change of Control.................................................................................      51
10.12   Failure of Security...............................................................................      51
10.13   Confirmation Order................................................................................      51
10.14   Lien Challenge....................................................................................      51
SECTION 11.     RIGHTS AND REMEDIES........................................................................      51
11.1    Remedies Upon Event of Default....................................................................      52
11.2    Waivers...........................................................................................      53
11.3    Performance by Administrative Agent...............................................................      53
11.4    Delegation of Duties; Reliance....................................................................      54
11.5    Not in Control....................................................................................      54
11.6    Course of Dealing.................................................................................      54
11.7    Cumulative Rights.................................................................................      55
11.8    Application of Proceeds...........................................................................      55
11.9    Certain Proceedings...............................................................................      55
11.10   Expenditures by Lenders...........................................................................      55
11.11   INDEMNIFICATION...................................................................................      55
SECTION 12.     AGREEMENT AMONG LENDERS....................................................................      56
12.1    Administrative Agent..............................................................................      56
12.2    Expenses..........................................................................................      57
12.3    Proportionate Absorption of Losses................................................................      57
12.4    Delegation of Duties; Reliance....................................................................      58
12.5    Limitation of Liability...........................................................................      58
12.6    Event of Default; Collateral......................................................................      59
12.7    Limitation of Liability...........................................................................      60
12.8    Relationship of Lenders...........................................................................      60
12.9    Benefits of Agreement.............................................................................      60
12.10   Obligations Several...............................................................................      61
SECTION 13.     MISCELLANEOUS..............................................................................      61
13.1    Headings..........................................................................................      61
13.2    Nonbusiness Days..................................................................................      61
13.3    Communications....................................................................................      61
13.4    Form and Number of Documents......................................................................      62
13.5    Survival..........................................................................................      62
13.6    Governing Law.....................................................................................      62
13.7    Invalid Provisions................................................................................      62
13.8    ENTIRETY..........................................................................................      62
13.9    JURISDICTION; VENUE; SERVICE OF PROCESS; JURY TRIAL...............................................      62
13.10   Amendments, Consents, Conflicts, and Waivers......................................................      63
13.11   Multiple Counterparts.............................................................................      64

iii

13.12   Successors and Assigns; Assignments and Participations............................................      64
13.13   Uniform Commercial Code...........................................................................      65
13.14   Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances.......................      65
13.15   Uniform Commercial Code...........................................................................       1
13.16   Discharge Only Upon Payment in Full; Reinstatement in Certain Circumstances.......................       1

iv

SCHEDULES AND EXHIBITS

Schedule C             -   Commercial Tort Claims
Schedule P             -   Proprietary Rights
Schedule 2.1           -   Lenders and Commitments
Schedule 2.7           -   Initial Collection Account Banks
Schedule 6             -   Conditions Precedent to Closing
Schedule 7.1           -   Subsidiaries/Capitalization
Schedule 7.2           -   Locations of Collateral; Borrower's address, FEIN and
Organizational ID Number
Schedule 7.5(a)(i)     -   Oil and Gas Properties
Schedule 7.5(a)(ii)    -   Net Revenue Interests
Schedule 7.5(a)(iii)   -   Material Contracts
Schedule 7.5(a)(iv)    -   Real Property
Schedule 7.6(e)        -   Imbalances or "Take or Pay" Payments
Schedule 7.7           -   Operations of Hydrocarbon Interests
Schedule 8.5           -   Insurance
Schedule 9.1           -   Existing Indebtedness
Schedule 9.2           -   Existing Liens

Exhibit A              -   Form of Term Loan Note
Exhibit B              -   [Intentionally Left Blank]
Exhibit C              -   Form of Assignment and Assumption
Exhibit D              -   Form of Letter in Lieu of Transfer Order

v

TERM LOAN AND SECURITY AGREEMENT

THIS TERM LOAN AND SECURITY AGREEMENT is entered into as of November 16,
2004, among PANACO, INC., a Delaware corporation ("BORROWER"), Lenders
(hereinafter defined), and MID RIVER LLC, a Delaware limited liability company,
as Administrative Agent (hereinafter defined), for itself and the other Lenders.

RECITALS

WHEREAS, Borrower is a reorganized debtor in Case No. 02-37811 (the
"CHAPTER 11 CASE") in the United States Bankruptcy Court for the Southern
District Of Texas, Houston Division (the "COURT"); and

WHEREAS, Borrower is a party to that certain Amended and Restated Loan and
Security Agreement (as amended) dated as of September 30, 1999, among the
Borrower, Mid River LLC, as substitute agent, and the various lenders party
thereto; and

WHEREAS, the Borrower has filed that certain Fifth Amended Joint Plan of
Reorganization, as modified, dated as of October 29, 2004, and that certain
Fifth Amended Joint Disclosure Statement Under Section 1125 of the Bankruptcy
Code Regarding Fifth Amended Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code of Panaco, Inc., dated as of August 25, 2004 (together with
any amendment or modifications thereto consented to by the Lenders,
collectively, the "REORGANIZATION PLAN"); and

WHEREAS, the Reorganization Plan was confirmed pursuant to that certain
Findings of Fact, Conclusions of Law and Order Confirming Fifth Amended Plan of
Reorganization, as Modified, and Disallowing Ballots of James Maxwell and Bob
Mallory entered by the Court in the Chapter 11 Case on November 3, 2004 (the
"CONFIRMATION ORDER"), after a final hearing under Bankruptcy Rule 3020, which
Order is reasonably satisfactory in form and substance to Administrative Agent
and the Required Lenders, and

WHEREAS, as set forth in the Reorganization Plan and Confirmation Order,
Borrower is restructuring the claims of Lenders in the Chapter 11 Case in
accordance with the Reorganization Plan; and

WHEREAS, Administrative Agent and the Lenders are willing to extend such
financing to Borrower in accordance with and subject to the terms and conditions
set forth in this Agreement:

NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

SECTION 1. DEFINITIONS AND TERMS.

1.1 DEFINITIONS. As used herein:

ACCOUNT DEBTOR means any Person who is or who may become obligated under,
with respect to, or on account of, an Account, Chattel Paper, or a General
Intangible.

ACCOUNTS means all of Borrower's now owned or hereafter acquired right,
title, and interest with respect to "accounts" as that term is defined in the
UCC, and any and all Supporting Obligations in respect thereof.

TERM LOAN AND SECURITY AGREEMENT

ADMINISTRATIVE AGENT means Mid River LLC, a Delaware limited liability
company, and its permitted successors and assigns as "ADMINISTRATIVE AGENT" for
Lenders under the Loan Documents.

AFFILIATE of any Person means any other individual or entity (i) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such Person, or (ii) 5% or more
of the Voting Stock (or in the case of an entity which is not a corporation, 5%
or more of the voting equity interest) of which is beneficially owned or held by
such Person; and, for purposes of this definition only, "control," "controlled
by," and "under common control with" mean possession, directly or indirectly, of
the power to direct or cause the direction of management or policies (whether
through ownership of voting securities, by contract, or otherwise).

AGREEMENT means this Term Loan and Security Agreement (as the same may
hereafter be amended, modified, supplemented, or restated from time to time).

APPLICABLE LENDING OFFICE means, for each Lender, the "Lending Office" of
such Lender (or an affiliate of such Lender) designated on SCHEDULE 2.1,
attached hereto or such other office that such Lender (or an affiliate of such
Lender) may from time to time specify to Administrative Agent and Borrowers by
written notice in accordance with the terms hereof.

ASSIGNMENT AND ASSUMPTION means an assignment and assumption entered into
by a Lender and its assignee and accepted by Administrative Agent, in
substantially the form of EXHIBIT C or any other form approved by Administrative
Agent.

AUTHORIZATIONS means all material filings, recordings, and registrations
with, and all material validations or exemptions, approvals, orders,
authorizations, consents, franchises, licenses, certificates, certificates of
compliance, grants of authority, and permits from, any Governmental Authority.

BOOKS means Borrower's now owned or hereafter acquired books and records
(including all of its Records indicating, summarizing, or evidencing its assets
(including the Collateral) or liabilities, all of Borrower's records relating to
its business operations or financial condition, and all of its goods or General
Intangibles related to such information).

BORROWER is defined in the preamble to this Agreement.

BORROWING means any amount disbursed (a) by one or more Lenders under the
Loan Documents, whether such amount constitutes an original disbursement of
funds or the continuation of an amount outstanding, or (b) by any Lender in
accordance with, and to satisfy the obligations of any Borrower under, any Loan
Document.

BUSINESS DAY means for all purposes, any day other than Saturday, Sunday,
and any other day on which commercial banking institutions are required or
authorized by Law to be closed in Dallas, Texas or New York, New York.

CAPITAL LEASE means any capital lease or sublease which should be
capitalized on a balance sheet in accordance with GAAP.

CASH EQUIVALENTS means:

TERM LOAN AND SECURITY AGREEMENT

2

(a) Readily marketable, direct, full faith and credit obligations of
the United States of America, or obligations guaranteed by the full faith
and credit of the United States of America, maturing within not more than
one year from the date of acquisition;

(b) Readily marketable, direct obligations issued by any state of
the United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within not more than
one year from the date of acquisition, and, at the time of acquisition,
having the highest rating obtainable from either Moody's Investors
Service, Inc. ("MOODY'S") or Standard and Poor's Rating Group (a division
of McGraw-Hill, Inc., "S

(c) Commercial paper maturing no more than one year from the date of
issuance and rated, at the time of acquisition, at least P-1 from Moody's
or at least A-1 from SP

(d) Short term certificates of deposit or banker's acceptances
maturing within one year from the date of issuance having a rating of at
least P-1 from Moody's or at least A-1 from S&P, issued by any Lender or
any commercial bank organized under the Laws of the United States of
America, or any state thereof or the District of Columbia, having combined
capital and surplus of not less than $250,000,000 (each Lender and such
commercial bank being herein called a "CASH EQUIVALENT BANK") and not
subject to set off Rights in favor of such bank;

(e) Eurodollar time deposits maturing within one year purchased
directly from any Cash Equivalent Bank (provided such deposit is with such
Cash Equivalent Bank or any other Cash Equivalent Bank); and

(f) any money market or mutual fund which invests only in the
foregoing types of investments and the liquidity of which is satisfactory
to Administrative Agent.

CHANGE OF CONTROL means that (a) except as otherwise permitted under the
Reorganization Plan, a majority of the members of the Board of Directors do not
constitute Continuing Directors, or (b) Borrower ceases to own, directly or
indirectly, and control 100% of the outstanding Stock of each of its
Subsidiaries extant as of the Closing Date.

CHATTEL PAPER means all of Borrower's now owned or hereafter acquired
right, title and interest in respect of "chattel paper" as such term is defined
in the UCC, including, without limitation, any tangible or electronic Chattel
Paper.

CLOSING DATE means the date upon which this Agreement has been executed by
Borrower, Lenders, and Administrative Agent and all conditions precedent
specified in SECTION 6 have been satisfied or waived.

CODE means the Internal Revenue Code of 1986, as amended, together with
the rules and regulations promulgated thereunder.

COLLATERAL means all of Borrower's now owned or hereafter acquired right,
title, and interest in and to each of the following:

(a) Accounts,

(b) Books,

(c) Chattel Paper,

TERM LOAN AND SECURITY AGREEMENT

3

(d) Commercial Tort Claims,

(e) Deposit Accounts,

(f) Equipment,

(g) General Intangibles,

(h) Inventory,

(i) Investment Property (including all of its securities and
Securities Accounts),

(j) Negotiable Collateral,

(k) Proprietary Rights,

(l) Oil and Gas Properties,

(m) Supporting Obligations,

(n) money, cash, Cash Equivalents, or other assets of Borrower that
now or hereafter come into the possession, custody, or control of any
member of the Lenders,

(o) the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance covering any or all
of the foregoing, and any and all Accounts, Books, Chattel Paper, Deposit
Accounts, Equipment, General Intangibles, Inventory, Investment Property,
Negotiable Collateral, Proprietary Rights, Oil and Gas Properties,
Supporting Obligations, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange, collection, or
other disposition of any of the foregoing, or any portion thereof or
interest therein, and the proceeds thereof; provided, however, that
Collateral shall not include any molds or tools that are owned by third
parties but located on Borrower's premises, and

(p) to the extent not included in the foregoing, all other personal
property of Borrower of any kind or description.

COLLATERAL DOCUMENTS means the Mortgages, the Letters in Lieu, and all
other security agreements, pledge agreements, mortgages, financing statements,
assignments of partnership interests, and guaranties at any time delivered to
Administrative Agent to create or evidence Liens securing the Obligation (or any
part thereof), together with all reaffirmations, amendments, and modifications
thereof or supplements thereto.

COLLECTIONS means all cash, checks, notes, instruments, and other items of
payment (including insurance proceeds, proceeds of cash sales, rental proceeds,
and tax refunds) of Borrower.

COMMERCIAL TORT CLAIMS means all of Borrower's now owned or hereafter
acquired right, title and interest with respect to any "commercial tort claim"
as such term is defined in the UCC, including without limitation, the Commercial
Tort Claims on SCHEDULE C.

TERM LOAN AND SECURITY AGREEMENT

4

COMMITMENT PERCENTAGE means, at any date of determination, for any Lender,
the proportion (stated as a percentage) that its Committed Sum bears to the
aggregate Committed Sums of all Lenders.

COMMITTED SUM means, at any date of determination occurring prior to the
initial Borrowing, the amount stated beside such Lender's name on SCHEDULE 2.1
to this Agreement.

CONTINUING DIRECTOR means (a) any member of the Board of Directors who was
a director (or comparable manager) of Borrower on the Closing Date, and (b) any
individual who becomes a member of the Board of Directors after the Closing Date
if such individual was appointed or nominated for election to the Board of
Directors by a majority of the Continuing Directors, but excluding any such
individual originally proposed for election in opposition to the Board of
Directors in office at the Closing Date in an actual or threatened election
contest relating to the election of the directors (or comparable managers) of
Borrower and whose initial assumption of office resulted from such contest or
the settlement thereof.

CONTRACTUAL OBLIGATION means, as applied to any Person, any provision of
any security or equity issued by that Person or of any material indenture,
mortgage, deed of trust, contract, undertaking, agreement, or other instrument
to which that Person is a party or by which it or any of its properties is bound
or to which it or any of its properties is subject.

DDA means any checking or other demand deposit account maintained by
Borrower.

DEBTOR RELIEF LAWS means the Bankruptcy Code of the United States of
America and all other applicable liquidation, conservatorship, bankruptcy,
moratorium, rearrangement, receivership, insolvency, reorganization, fraudulent
transfer or conveyance, suspension of payments, or similar Laws from time to
time in effect affecting the Rights of creditors generally.

DEPOSIT ACCOUNTS means all of Borrower's now owned or hereafter acquired
right, title and interest with respect to any "deposit account" as such term is
defined in the UCC, including, without limitation, any DDAs.

DESIGNATED ACCOUNT means account number 033595241 of Panaco maintained
with Borrower's Designated Account Bank, or such other deposit account of Panaco
(located within the United States) which has been designated, in writing and
from time to time, by Borrower to Administrative Agent.

DESIGNATED ACCOUNT BANK means First American Bank, SSB, whose office is
located at One Lincoln Park, 8401 N. Central Expressway #500, Dallas, TX 752255.

DOLLARS and the symbol $ means lawful money of the United States of
America.

EMPLOYEE PLAN means, at any time, each Single-Employer Plan and each
Multiemployer Plan.

ENVIRONMENTAL CLAIM means any written accusation, allegation, notice of
violation, claim, demand, abatement order or other order, or direction
(conditional or otherwise) by any Governmental Authority or any Person for any:
costs of investigation and remediation; contribution or indemnity; direct,
indirect, or consequential damages, including, without limitation, personal
injury (including sickness, disease, or death), tangible or intangible property
damage, natural resources, or other damages or adverse effects on the
environment; or for fines, penalties, or restrictions, in each case relating to,
resulting from, or in connection with Hazardous Materials or any violation of
Environmental Laws and relating to Borrower, any of its Subsidiaries, any of
their respective Affiliates that are directly or indirectly controlled by
Borrower, or any Facility which in any case could reasonably be expected to have
a Material Adverse Effect.

TERM LOAN AND SECURITY AGREEMENT

5

ENVIRONMENTAL LAW means all laws, statutes, ordinances, judicial, or
administrative orders, rules, regulations, plans, policies, or decrees and the
like relating to (a) environmental matters, including, without limitation, those
relating to fines, injunctions, penalties, damages, contribution, cost recovery
compensation, losses, or injuries resulting from the Release or threatened
Release of Hazardous Materials, (b) the generation, use, storage,
transportation, or disposal of Hazardous Materials, or (c) occupational safety
and health, public health and safety, industrial hygiene or protection of the
environment, including environmentally sensitive aspects such as wetlands and
endangered species, in any manner applicable to Borrower or any of its
Subsidiaries or any of their respective properties, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Materials
Transportation Act (49 U.S.C. Section 1801 et seq.), the Resource Conservation
and Recovery Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C.
Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601
et seq.), the Federal Insecticide, Fungicide and Rodenticide Act (7 U.S.C.
Section 136 et seq.), the Occupational Safety and Health Act (29 U.S.C. Section
651 et seq.) and the Emergency Planning and Community Right-to-Know Act (42
U.S.C. Section 11001 et seq.), each as amended or supplemented, and any
analogous future or present local, state and federal statutes and regulations
promulgated pursuant thereto, each as in effect as of the date of determination.
The term "oil" shall have the meaning specified in OPA, the terms "hazardous
substance" and "release" (or "threatened release") have the meanings specified
in CERCLA, the terms "solid waste" and "disposal" (or "disposed") have the
meanings specified in RCRA and the term "oil and gas waste" shall have the
meaning specified in Section 91.1011 of the Texas Natural Resources Code
("SECTION 91.1011"); provided, however, that (a) in the event either OPA,
CERCLA, RCRA or Section 91.1011 is amended so as to broaden the meaning of any
term defined thereby, such broader meaning shall apply subsequent to the
effective date of such amendment and (b) to the extent the laws of the state or
other jurisdiction in which any Property of the Borrower or any Subsidiary is
located establish a meaning for "oil," "hazardous substance," "release," "solid
waste," "disposal" or "oil and gas waste" which is broader than that specified
in either OPA, CERCLA, RCRA or Section 91.1011, such broader meaning shall
apply.

EQUIPMENT means all of Borrower's now owned or hereafter acquired right,
title, and interest with respect to equipment, machinery, machine tools, motors,
furniture, furnishings, fixtures, vehicles (including motor vehicles), computer
hardware, tools, parts, and goods (other than consumer goods, farm products, or
Inventory), wherever located, including all attachments, accessories,
accessions, replacements, substitutions, additions, and improvements to any of
the foregoing.

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

ERISA AFFILIATE means any Borrower or trade or business (whether or not
incorporated) which, for purposes of Title IV of ERISA, is, or has been within
the past six years, a member of any Borrower's controlled group or which is, or
has been within the past six years, under common control with any Borrower
within the meaning of Section 414(b), (c), (m), or (o) of the Code.

ERISA EVENT means (i) a "reportable event" within the meaning of Section
4043(c) of ERISA and the regulations issued thereunder with respect to any
Employee Plan (excluding those for which the provision for 30-day notice to the
PBGC has been waived by regulation or with respect to which no penalty will be
assessed by the PBGC for failure to satisfy such notice requirements); (ii) the
failure to meet the minimum funding standard of Section 412 of the Code with
respect to any Employee Plan (whether or not waived in accordance with Section
412(d) of the Code) or the failure to make by its due date a required
installment under Section 412(m) of the Code with respect to any Single-Employer
Plan or the failure to make any required contribution to a Multiemployer Plan;
(iii) the provision by the

TERM LOAN AND SECURITY AGREEMENT

6

administrator of any Employee Plan pursuant to Section 4041(a)(2) of ERISA of a
notice of intent to terminate such plan in a distress termination described in
Section 4041(c) of ERISA; (iv) the withdrawal by Borrower or any of its ERISA
Affiliates from any Employee Plan with two or more contributing sponsors or the
termination of any such Employee Plan resulting, in either case, in liability
pursuant to Section 4063 or 4064 of ERISA, respectively; (v) the institution by
the PBGC of proceedings to terminate any Employee Plan pursuant to Section 4042
of ERISA; (vi) the imposition of liability on Borrower or any of its ERISA
Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the
application of Section 4212(c) of ERISA; (vii) the withdrawal by Borrower or any
of its ERISA Affiliates in a complete or partial withdrawal (within the meaning
of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan resulting in
withdrawal liability pursuant to Section 4201 of ERISA, or the receipt by
Borrower or any of its ERISA Affiliates of written notice from any Multiemployer
Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245
of ERISA, or that it intends to terminate or has terminated under Section 4042
of ERISA or under Section 4041A of ERISA if such termination would result in
liability to Borrower or any of its ERISA Affiliates; (viii) the imposition on
Borrower or any of its ERISA Affiliates of fines, penalties, or taxes under
Chapter 43 of the Code or under Section 409 or 502(c), (i) or (l) or 4071 of
ERISA in respect of any Employee Plan; (ix) the failure of any Employee Plan (or
any other Employee Plan intended to be qualified under Section 401(a) of the
Code) to qualify under Section 401(a) of the Code, or the failure of any trust
forming part of any Employee Plan to qualify for exemption from taxation under
Section 501(a) of the Code; or (x) the imposition of a Lien pursuant to Section
401(a)(29) or 412(n) of the Code or pursuant to ERISA with respect to any
Employee Plan.

EVENT OF DEFAULT is defined in SECTION 10.

EXCHANGE ACT means the Securities Exchange Act of 1934, as amended from
time to time, and any successor statute.

EXHIBIT means an exhibit to this Agreement unless otherwise specified.

FACILITIES means any and all real property (including, without limitation,
all buildings, fixtures, or other improvements located thereon) now, hereafter,
or heretofore owned, leased, operated, or used by Borrower or any of its
Subsidiaries (but only as to portions of buildings actually leased or used) or
any of their respective predecessors or any of their respective Affiliates that
are directly or indirectly controlled by Borrower.

FEDERAL FUNDS RATE means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) determined (which
determination shall be conclusive and binding, absent manifest error) by
Administrative Agent to be equal to the weighted average of the rates on
overnight Federal funds transactions with member banks of the Federal Reserve
System arranged by Federal funds brokers on such day, as published by the
Federal Reserve Bank of New York on the Business Day next succeeding such day;
provided that (a) if such day is not a Business Day, the Federal Funds Rate for
such day shall be such rate on such transactions on the next preceding Business
Day as so published on the next succeeding Business Day, and (b) if no such rate
is so published on such next succeeding Business Day, the Federal Funds Rate for
such day shall be the average rate charged to Administrative Agent (in its
individual capacity) on such day on such transactions as determined by
Administrative Agent (which determination shall be conclusive and binding,
absent manifest error).

FISCAL YEAR means the fiscal year of Borrower and its Subsidiaries ending
on December 31 of each calendar year.

TERM LOAN AND SECURITY AGREEMENT

7

GAAP means generally accepted accounting principles of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
the Financial Accounting Standards Board which are applicable from time to time.

GENERAL INTANGIBLES means all of Borrower's now owned or hereafter
acquired right, title, and interest with respect to "general intangibles" (as
that term is defined in the UCC), including payment intangibles, contract
rights, rights to payment, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill, patents, trade names,
trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders,
customer lists, monies due or recoverable from pension funds, route lists,
rights to payment and other rights under any royalty or licensing agreements,
infringement claims, computer programs, information contained on computer disks
or tapes, software, literature, reports, catalogs, money, deposit accounts,
insurance premium rebates, tax refunds, and tax refund claims, and any and all
Supporting Obligations in respect thereof, and any other personal property other
than goods, money, Accounts, Chattel Paper, Commercial Tort Claims, Deposit
Accounts, Investment Property, and Negotiable Collateral.

GOVERNMENTAL AUTHORITY means any (a) state, county, city, town, village,
or other local, state, or federal judicial, executive, regulatory, or
legislative instrumentality, (b) private arbitration board or panel, or (c)
central bank.

HAZARDOUS MATERIALS means (a) any chemical, material or substance defined
as or included in the definition of "hazardous substances", "pollutant or
contaminant", "hazardous wastes", "hazardous materials", "extremely hazardous
waste", "restricted hazardous waste", "infectious waste", "toxic substances" or
any other formulations intended to define, list or classify substances by reason
of deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP
toxicity" or words of similar import under any applicable Environmental Laws;
(b) any oil, petroleum, petroleum fraction, or petroleum derived substance; (c)
any drilling fluids, produced waters, and other wastes associated with the
exploration, development or production of crude oil, natural gas, or geothermal
resources; (d) any flammable substances or explosives; (e) any radioactive
materials; (f) asbestos in any form; (g) urea formaldehyde foam insulation; (h)
electrical equipment which contains any oil or dielectric fluid containing
levels of polychlorinated biphenyls; (i) pesticides; (j) infectious materials;
(k) toxic mold; and (l) any other chemical, material or substance, exposure to
which is prohibited, limited or regulated by any Governmental Authority.

HYDROCARBON INTERESTS means all rights, titles, interests and estates now
or hereafter acquired in and to oil and gas leases, oil, gas and mineral leases,
or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding
royalty and royalty interests, net profit interests and production payment
interests, including any reserved or residual interests of whatever nature.

HYDROCARBONS means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined or separated therefrom.

INDEBTEDNESS means, as applied to any Person, (a) all indebtedness for
borrowed money, (b) that portion of obligations with respect to Capital Leases
that is properly classified as a liability on a balance sheet in conformity with
GAAP, (c) notes payable and drafts accepted representing extensions of credit
whether or not representing obligations for borrowed money (other than accounts
payable incurred in the ordinary course of business and accrued expenses
incurred in the ordinary course of business), (d) any obligation owed for all or
any part of the deferred purchase price of property or services (excluding any
such obligations incurred under ERISA and other trade payables incurred in the
ordinary course of business) and (e) all indebtedness secured by any Lien on any
property or asset owned or held by that

TERM LOAN AND SECURITY AGREEMENT

8

Person regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is nonrecourse to the credit of that Person.

INVENTORY means all Borrower's now owned or hereafter acquired right,
title, and interest with respect to "inventory," as that term is defined in the
UCC.

INVESTMENT means (a) any direct or indirect purchase or other acquisition
by Borrower or any of its Subsidiaries of, or of a beneficial interest in, stock
or other securities or equity of any other Person (other than a Person that,
prior to such purchase or acquisition, was a wholly-owned Subsidiary of
Borrower), or (b) any direct or indirect loan, advance (other than advances to
employees for moving, entertainment, and travel expenses, drawing accounts, and
similar expenditures in the ordinary course of business) or capital contribution
by Borrower or any of its Subsidiaries to any other Person other than a
wholly-owned Subsidiary of Borrower, including all Indebtedness and accounts
receivable acquired from that other Person that are not current assets or did
not arise from sales to that other Person in the ordinary course of business;
provided, however, that the term "Investment" shall not include (i) current
trade and customer accounts receivable for goods furnished or services rendered
in the ordinary course of business and payable in accordance with customary
trade terms, (ii) advances and prepayments to suppliers for goods and services
in the ordinary course of business, (iii) stock or other securities acquired in
connection with the satisfaction or enforcement of Indebtedness or claims due or
owing to Borrower or any of its Subsidiaries or as security for any such
Indebtedness or claims, (iv) cash held in deposit accounts with banks, trust
companies, and Lenders, and (v) shares in a mutual fund that invests solely in
Cash Equivalents. The amount of any Investment shall be the original cost of
such Investment plus the cost of all additions thereto, without any adjustments
for increases or decreases in value, or write-ups, write-downs, or write-offs
with respect to such Investment.

INVESTMENT PROPERTY means all of Borrower's now owned or hereafter
acquired right, title, and interest with respect to "investment property" as
that term is defined in the UCC, and any and all supporting obligations in
respect thereof.

LAWS means all applicable statutes, laws, treaties, ordinances, tariff
requirements, rules, regulations, orders, writs, injunctions, decrees,
judgments, opinions, or interpretations of any Governmental Authority.

LENDERS means, on any date of determination, the financial institutions
named on SCHEDULE 2.1 (as the same may be amended from time to time to reflect
the assignments made in accordance with SECTION 13.12(b) of this Agreement), and
subject to the terms and conditions of this Agreement, and their respective
successors and assigns (but not any Participant who is not otherwise a party to
this Agreement).

LIEN means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement, or encumbrance of any kind, and any other
Right of or arrangement with any creditor (other than under or relating to
subordination or other intercreditor arrangements) to have its claim satisfied
out of any property or assets, or the proceeds therefrom, prior to the general
creditors of the owner thereof.

LITIGATION means any action by or before any Governmental Authority.

LOAN DOCUMENTS means (a) this Agreement, the Term Loan Notes, and the
Collateral Documents, (b) all agreements, documents, or instruments in favor of
Administrative Agent or Lenders ever delivered pursuant to this Agreement or
otherwise delivered in connection with all or any part of the Obligation, and
(c) any and all future renewals, extensions, restatements, reaffirmations, or
amendments of, or supplements to, all or any part of the foregoing.

TERM LOAN AND SECURITY AGREEMENT

9

LOAN PARTIES means, on any date of determination, Borrower and any other
obligor under a Loan Document other than Administrative Agent or Lenders.

LOCKBOX ACCOUNT shall mean a depositary account established pursuant to
one of the Lockbox Agreements.

LOCKBOX AGREEMENTS means Lockbox Operating Procedural Agreements and those
certain Depository Account Agreements, in form and substance satisfactory to
Administrative Agent, each of which is among Borrower, Administrative Agent, and
one of the Lockbox Banks.

LOCKBOX BANKS means Southwest Bank of Texas or such other banks as may be
agreed to by Borrower and Lender from time to time.

LOCKBOXES has the meaning set forth in SECTION 3.12(a).

MARGIN STOCK has the meaning assigned to that term in Regulation U.

MATERIAL ADVERSE EFFECT means any (a) material impairment of the ability
of any Loan Party to perform any payment or other obligations under any Loan
Document, (b) material and adverse effect on the business, operations,
prospects, properties, assets, or condition (financial or otherwise) of Borrower
and its Subsidiaries (taken as a whole), (c) material adverse effect upon the
legality, validity, binding effect, or enforceability against a Loan Party of
any Loan Document to which it is a party, or (d) a material impairment in the
perfection or priority of Administrative Agent's security interest in the
Collateral or in the value of such Collateral.

MAXIMUM AMOUNT and MAXIMUM RATE respectively mean, for each Lender, the
maximum non-usurious amount and the maximum non-usurious rate of interest which,
under applicable Law, such Lender is permitted to contract for, charge, take,
reserve, or receive on the Obligation.

MORTGAGE means a security instrument (whether designated as a deed of
trust or a mortgage or by any similar title) executed and delivered by any Loan
Party to the Administrative Agent, in the form as may be approved by
Administrative Agent in its sole discretion, in each case with such changes
thereto as may be recommended by Administrative Agent's local counsel based on
local laws or customary local mortgage or deed of trust practices, as such
security instrument may be amended, supplemented, or otherwise modified from
time to time. "MORTGAGES" means all such security instruments.

MORTGAGED PROPERTY means any Property owned by the Borrower which is
subject to the Liens existing and to exist under the terms of the Mortgages.

MULTIEMPLOYER PLAN means a multiemployer plan as defined in Sections 3(37)
or 4001(a)(3) of ERISA or Section 414(f) of the Code to which any Borrower, any
Subsidiary thereof, or any ERISA Affiliate of any Borrower is making, has made,
is accruing, or has accrued, an obligation to make contributions or has, within
any of the preceding five plan years, made or accrued an obligation to make
contributions.

NEGOTIABLE COLLATERAL means all of Borrower's now owned and hereafter
acquired right, title, and interest with respect to letters of credit, letter of
credit rights, instruments, promissory notes, drafts, and documents and any and
all Supporting Obligations in respect thereof.

TERM LOAN AND SECURITY AGREEMENT

10

NYMEX PRICE means, as of the date of the determination thereof, the
average of the 24 succeeding monthly futures contract prices, commencing with
the month during which the determination is to be made, for each of the
appropriate crude oil or natural gas categories included in the most recent
Reserve Report provided by Borrower to Administrative Agent pursuant to SECTION
8.2, as quoted on the New York Mercantile Exchange ("NYMEX"), or, if the NYMEX
no longer provides futures contract price quotes for 24 month periods, the
longest period of quotes of less than 24 months shall be used, and, if the NYMEX
no longer provides such futures contract quotes or has ceased to operate, the
Administrative Agent shall designate another nationally recognized commodities
exchange to replace the NYMEX.

NYMEX VALUE means, at any date of determination thereof as to any Proved
Reserves of Borrower, the result of

(a) the discounted present value of future net revenues (i.e., after
deducting production and ad valorem taxes and less future capital costs
and operating expenses) from Proved Reserves of Borrower as of such date
utilizing the NYMEX Price for the appropriate category of oil or gas as
quoted in a nationally recognized publication for such pricing as selected
as of such date by Administrative Agent and assuming that production costs
thereafter remain constant, then discounted at a rate of 10% per year to
obtain the present value; minus

(b) to the extent not taken into account in SUBPARAGRAPH (a) above,
the discounted present value (discounted at a rate of 10% per year) of
Borrower's future plugging and abandonment expenses; minus

(c) to the extent not taken into account in SUBPARAGRAPH (a) above,
minority interests and other interests of Persons other than Borrower and
any natural gas balancing liabilities of Borrower.

OBLIGATION means all present and future indebtedness, liabilities, and
obligations, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Administrative Agent, any Lender, or any Affiliate of any
Lender by any Loan Party arising from, by virtue of, or pursuant to any Loan
Document, together with all interest accruing thereon, fees, costs, and expenses
(including, without limitation, all reasonable attorneys' fees and expenses
incurred in the enforcement or collection thereof) payable under the Loan
Documents.

OFFICER'S CERTIFICATE means, with respect to any Person, a certificate
executed on behalf of such Person, (a) if such Person is a partnership, by the
chairman of the Board (if an officer) or chief executive officer and/or by the
chief financial officer of its general partner and (b) if such Person is a
corporation, on behalf of such corporation by its chairman of the board (if an
officer) or chief executive officer or its chief financial officer or vice
president.

OIL AND GAS PROPERTIES means (a) Hydrocarbon Interests; (b) the Properties
now or hereafter pooled or unitized with Hydrocarbon Interests; (c) all
presently existing or future unitization, pooling agreements and declarations of
pooled units and the units created thereby (including without limitation all
units created under orders, regulations and rules of any Governmental Authority)
which may affect all or any portion of the Hydrocarbon Interests; (d) all
operating agreements, contracts and other agreements, including production
sharing contracts and agreements, which relate to any of the Hydrocarbon
Interests or the production, sale, purchase, exchange or processing of
Hydrocarbons from or attributable to such Hydrocarbon Interests; (e) all
Hydrocarbons in and under and which may be produced and saved or attributable to
the Hydrocarbon Interests, including all oil in tanks, and all rents, issues,
profits, proceeds, products, revenues and other incomes from or attributable to
the Hydrocarbon Interests; (f) all tenements,

TERM LOAN AND SECURITY AGREEMENT

11

hereditaments, appurtenances and Properties in any manner appertaining,
belonging, affixed or incidental to the Hydrocarbon Interests and (g) all
Properties, rights, titles, interests and estates described or referred to
above, including any and all Property, real or personal, now owned or
hereinafter acquired and situated upon, used, held for use or useful in
connection with the operating, working or development of any of such Hydrocarbon
Interests or Property (excluding drilling rigs, automotive equipment, rental
equipment or other personal Property which may be on such premises for the
purpose of drilling a well or for other similar temporary uses) and including
any and all oil wells, gas wells, injection wells or other wells, buildings,
structures, fuel separators, liquid extraction plants, plant compressors, pumps,
pumping units, field gathering systems, tanks and tank batteries, fixtures,
valves, fittings, machinery and parts, engines, boilers, meters, apparatus,
equipment, appliances, tools, implements, cables, wires, towers, casing, tubing
and rods, surface leases, rights-of-way, easements and servitudes together with
all additions, substitutions, replacements, accessions and attachments to any
and all of the foregoing.

PARTICIPANT is defined in SECTION 13.12(c).

PBGC means the Pension Benefit Guaranty Corporation, or any successor
thereof, established pursuant to ERISA.

PERMITTED LIENS means (a) Liens held by Administrative Agent for the
benefit of the Lenders, (b) Liens for unpaid taxes that either (i) are not yet
due and payable or (ii) are the subject of Permitted Protests, (c) Liens set
forth on SCHEDULE 9.2, (d) the interests of lessors under operating leases and
purchase money Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under SECTION 9.2(c)
and so long as the Lien only attaches to the asset purchased or acquired and
only secures the purchase price of the asset, (e) Liens arising by operation of
law in favor of warehousemen, landlords, carriers, mechanics, materialmen,
laborers, or suppliers, or other like Liens arising by operation of law
incidental to the exploration, development, operation and maintenance of Oil and
Gas Properties, in each case incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, which Liens are for
sums not yet due and payable whether or not perfected pursuant to applicable
law, (f) Liens arising from deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (g) Liens on deposits and escrowed
funds made to secure performance of bids, tenders and leases (to the extent
permitted under this Agreement) incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, (h) Liens of or
resulting from any judgment or award that do not result in and reasonably could
not be expected to result in a Material Adverse Effect and as to which the time
for the appeal or petition for rehearing of which has not yet expired, or in
respect of which Borrower is in good faith prosecuting an appeal or proceeding
for a review and in respect of which a stay of execution pending such appeal or
proceeding for review has been secured, (i) Liens with respect to the Oil and
Gas Properties that are exceptions to the title opinions issued in connection
with the Mortgages, (j) with respect to any Oil and Gas Properties consisting of
Hydrocarbon Interests acquired by Borrower or any of its Subsidiaries after the
date of this Agreement, (i) minor defects in title which (A) do not affect the
marketability thereof or restrict the full use or other benefits of ownership by
Borrower or such Subsidiary, as the case may be, and (B) do not affect the
ability of Borrower or such Subsidiary, as the case may be, to receive a share
of production or proceeds from, allocated to, or attributable to such
Hydrocarbon Interests equal to the interest of Borrower or such Subsidiary, as
the case may be, therein as represented herein or in the other Loan Documents,
and (C) do not materially interfere with the ordinary conduct of the business of
Borrower or such Subsidiary, as the case may be, and (D) do not interfere with
or impair the value of Administrative Agent's Lien therein for the benefit of
the Lenders, and (E) are customarily waived by reasonable and prudent operators,
and (ii) Liens reserved in leases or farmout agreements for rent or royalties
and for compliance with the terms of the farmout agreements or leases in the
case of leasehold estates, to the extent that any such Lien referred to in this
clause does not materially impair the use of the Hydrocarbon Interest covered by
such Lien for the purposes for which such

TERM LOAN AND SECURITY AGREEMENT

12

Hydrocarbon Interest is held by the Borrower or any Subsidiary, does not
materially interfere with or impair the value of such Hydrocarbon Interest
subject thereto or Administrative Agent's Lien therein for the benefit of the
Lenders, is customarily waived by reasonable and prudent operators, and is
consented to in writing by Administrative Agent, (k) farmout, carried working
interests, joint operating, unitization, royalty, overriding royalty, sales and
similar agreements relating to the exploration or development of, or production
from, Oil and Gas Properties or the sale of the hydrocarbons after they are
produced which are existing at the time of acquisition of such Oil and Gas
Property, are usual and customary for the industry, and are disclosed to and
approved by Administrative Agent.

PERMITTED PROTEST means the right of Borrower to protest any Lien other
than any such Lien that secures the Obligations, tax (other than payroll taxes
or taxes that are the subject of a United States federal tax lien), or rental
payment, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Administrative Agent, (b) any such protest is instituted and
diligently prosecuted by Borrower in good faith, and (c) Administrative Agent is
satisfied that, while any such protest is pending, there will be no impairment
of the enforceability, validity, or priority of any of the Agent's Liens in and
to the Collateral.

PERSON means any individual, entity, or Governmental Authority.

PERSONAL PROPERTY COLLATERAL means all Collateral other than Oil and Gas
Properties.

POST-DEFAULT RATE means a per annum rate of interest equal from day to day
to the lesser of (a) the then-effective non-Default interest rate, plus 2% and
(b) the Maximum Rate.

POTENTIAL DEFAULT means the occurrence of any event or existence of any
circumstance which, with the giving of notice or lapse of time or both, would
become an Event of Default.

PROPERTY means any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible, including, without
limitation, cash, securities, accounts and contract rights.

PROPRIETARY RIGHTS means all of Borrower's now owned and hereafter arising
or acquired licenses, franchises, permits, patents, patent rights, copyrights,
works which are the subject matter of copyrights, trademarks, service marks,
trade names, trade styles, patent, trademark and service mark applications, and
all licenses and rights related to any of the foregoing, including those
patents, trademarks, service marks, trade names and copyrights set forth on
SCHEDULE P hereto, and all other rights under any of the foregoing, all
extensions, renewals, reissues, divisions, continuations, and
continuations-in-part of any of the foregoing, and all rights to sue for past,
present and future infringement of any of the foregoing.

PROVED DEVELOPED NON-PRODUCING RESERVES means Proved Reserves of Borrower,
other than Proved Developed Producing Reserves and Proved Undeveloped Reserves,
that can be expected to be recovered through existing wells with existing
equipment and operating methods.

PROVED DEVELOPED PRODUCING RESERVES means Proved Reserves of Borrower,
other than Proved Developed Non-Producing Reserves and Proved Undeveloped
Reserves, that can be expected to be recovered from currently producing zones
under the continuation of present operating methods.

PROVED RESERVES means at any particular time, the estimated quantities of
Hydrocarbons which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs attributable
to Hydrocarbon Interests included or to be included in the Reserve Report under
existing economic and operating conditions.

TERM LOAN AND SECURITY AGREEMENT

13

PROVED UNDEVELOPED RESERVES means Proved Reserves of Borrower, other than
Proved Developed Producing Reserves and Proved Developed Non-Producing Reserves,
that are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion.

PV-10 VALUE means, at any date of determination thereof, as to any Proved
Reserves, the result of:

(a) the discounted present value of future net revenues (i.e., after
deducting production and ad valorem taxes and less future capital costs
and operating expenses) from such Proved Reserves as most recently
estimated in a Reserve Report utilizing the spot price for the appropriate
category of oil or gas as quoted in a nationally recognized publication
selected by Administrative Agent for such pricing as of the date of the
determination of PV-10 Value and assuming that production costs thereafter
remain constant, then discounted at a rate of 10% per year to obtain the
present value; minus

(b) to the extent not taken into account in SUBPARAGRAPH (a) above,
the discounted present value of Borrower's future plugging and abandonment
expenses; minus

(c) to the extent not taken into account in SUBPARAGRAPH (a) above,
minority interests and other interests of Persons other than Borrower and
any natural gas balancing liabilities of Borrower.

REGULATION D means Regulation D of the Board of Governors of the Federal
Reserve System, as amended.

REGULATION U means Regulation U of the Board of Governors of the Federal
Reserve System, as amended.

RELEASE means any release, spill, emission, emptying, leaking, pumping,
pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping,
leaching, or migration of Hazardous Materials into or in the indoor or outdoor
environment (including, without limitation, the abandonment or disposal of any
barrels, containers, or other closed receptacles containing any Hazardous
Materials), or into or out of any Facility, including the movement of any
Hazardous Material through the air, soil, surface water, groundwater, or
property.

REPRESENTATIVES means representatives, officers, directors, employees,
attorneys, and agents.

REQUIRED LENDERS means those Lenders holding 65% or more of the Term Loan
Principal Debt.

RESERVE REPORT means a report, in form and substance satisfactory to
Administrative Agent,, prepared by a firm of independent petroleum engineers
acceptable to Administrative Agent evaluating the oil and gas reserves
attributable to the Hydrocarbon Interests of Borrower and its Subsidiaries (as
determined on an unconsolidated basis) which shall, among other things, (a)
identify the wells covered thereby, (b) specify said third party's opinions with
respect to the total volume of Proved Reserves (specifying with such opinions
the terms of categories Proved Developed Producing Reserves, Proved Developed
Non-Producing Reserves and Proved Undeveloped Reserves) which Borrower has the
right to produce (or cause to be produced) for its own account, (c) set forth
said firm's opinions with respect to the PV-10 Value and the NYMEX Value of each
of the categories of the Proved Reserves as specified in SUBCLAUSE (b) above,
(d) set forth said firm's opinions with respect to the projected future rate of

TERM LOAN AND SECURITY AGREEMENT

14

production of the Proved Reserves, (e) contain such other information as
requested by Administrative Agent with respect to the projected rate of
production, gross revenues, operating expenses, net income, taxes, capital
expenditures and other capital costs, net revenues and present value of future
net revenues attributable to such reserves and production therefrom, and (f)
contain a statement of the price and escalation parameters, procedures and
assumptions upon which such determinations were based.

RIGHTS means rights, remedies, powers, privileges, and benefits.

SCHEDULE means, unless specified otherwise, a schedule attached to this
Agreement, as the same may be supplemented and modified from time to time in
accordance with the terms of the Loan Documents.

SECURITIES ACCOUNT means a "securities account" as that term is defined in
the UCC.

SECURITIES ACT means the Securities Act of 1933, as the same may be
amended, modified or supplemented from time to time, and any successor statute
thereto, and any and all rules or regulations promulgated from time to time
thereunder.

SINGLE-EMPLOYER PLAN means an employee pension benefit plan covered by
Title IV of ERISA or subject to the minimum funding standards under Section 412
of the Code and established or maintained by any Borrower, Subsidiary thereof,
or ERISA Affiliate of any Borrower, but not including any Multiemployer Plan.

SUBSIDIARY of any Person means (a) any entity of which an aggregate of
more than 50% (in number of votes) of the stock, membership interests, or other
equity interests is owned of record or beneficially, directly or indirectly, by
such Person, or (b) any partnership (limited or general) of which such Person
shall at any time be the controlling general partner determined in accordance
with GAAP or own more than 50% of the issued and outstanding partnership
interests.

SUPPORTING OBLIGATIONS means all of Borrower's now owned or hereafter
acquired right, title and interest with respect to any "supporting obligation"
as that term is defined in the UCC.

SWAP AGREEMENT means any agreement with respect to any swap, forward,
future or derivative transaction or option or similar agreement, whether
exchange traded, "over-the-counter" or otherwise, involving, or settled by
reference to, one or more rates, currencies, commodities, equity or debt
instruments or securities, or economic, financial or pricing indices or measures
of economic, financial or pricing risk or value or any similar transaction or
any combination of these transactions; provided that no phantom stock or similar
plan providing for payments only on account of services provided by current or
former directors, officers, employees or consultants of the Borrower or the
Subsidiaries shall be a Swap Agreement.

TAXES is defined in SECTION 4.1.

TERM LOAN FACILITY means the credit facility as described in and subject
to the limitations set forth in SECTION 2 hereof.

TERM LOAN NOTE means a promissory note substantially in the form of
EXHIBIT A, and all renewals and extensions of all or any part thereof.

TERM LOAN PRINCIPAL DEBT means, on any date of determination, the
aggregate unpaid principal balance of the sum of all Borrowings under the Term
Loan Facility.

TERM LOAN AND SECURITY AGREEMENT

15

TERMINATION DATE means the earlier of (a) September 30, 2011, and (b) the
effective date of any other acceleration of the Term Loan Principal Debt.

TRADEMARKS means all Borrower's now owned or hereafter arising or acquired
trademarks, service marks, trade names, trade styles, trademark and service mark
applications, and all licenses and rights related thereto, described in the
definition of Proprietary Rights.

UCC or UNIFORM COMMERCIAL CODE means the Uniform Commercial Code as in
effect from time to time in the State of New York - or, when the context
implies, the Uniform Commercial Code as in effect from time to time in any other
applicable jurisdiction - and shall include all successor provisions under any
subsequent version or amendment to any Article of the Uniform Commercial Code.

UNFUNDED CURRENT LIABILITY means, with respect to any Employee Plan, the
amount, if any, by which the actuarial present value of the accumulated plan
benefits under such Employee Plan as of the close of its most recent plan year
exceeds the fair market value of the assets allocable thereto, each determined
in accordance with Statement of Financial Accounting Standards No. 35, based
upon the actuarial assumptions used by such Employee Plan's actuary in the most
recent annual valuation of such Employee Plan.

VOTING STOCK means securities (as such term is defined in Section 2(1) of
the Securities Act) of any class or classes, the holders of which are
ordinarily, in the absence of contingencies, entitled to elect a majority of the
corporate directors (or Persons performing similar functions).

WALL STREET JOURNAL LIBOR DAILY FLOATING RATE means, for any day, a
fluctuating rate of interest equal to the one month London interbank offered
rate as published in the "Money Rates" Section of The Wall Street Journal on the
immediately preceding banking day (or, if such source is not available, such
alternate source as determined by the Administrative Agent), as adjusted from
time to time in the Administrative Agent's sole discretion for reserve
requirements, deposit insurance assessment rates and other regulatory costs.

1.2 NUMBER AND GENDER OF WORDS; OTHER REFERENCES. Unless otherwise
specified in the Loan Documents, (a) where appropriate, the singular includes
the plural and vice versa, and words of any gender include each other gender,
(b) heading and caption references may not be construed in interpreting
provisions, (c) monetary references are to currency of the United States of
America, (d) section, paragraph, annex, schedule, exhibit, and similar
references are to the particular Loan Document in which they are used, (e)
references to "telecopy," "facsimile," "fax," or similar terms are to facsimile
or telecopy transmissions, (f) references to "including" mean including without
limiting the generality of any description preceding that word, (g) the rule of
construction that references to general items that follow references to specific
items are limited to the same type or character of those specific items is not
applicable in the Loan Documents, (h) references to any Person include that
Person's heirs, personal representatives, successors, trustees, receivers, and
permitted assigns, (i) references to any Law include every amendment or
supplement to it, rule and regulation adopted under it, and successor or
replacement for it, and (j) references to any Loan Document or other document
include every renewal and extension of it, amendment and supplement to it, and
replacement or substitution for it.

1.3 ACCOUNTING PRINCIPLES. Except as otherwise expressly provided herein,
all accounting and financial terms used in the Loan Documents and the compliance
with each financial covenant therein shall be determined in accordance with
GAAP, and, all accounting principles shall be applied on a consistent basis so
that the accounting principles in a current period are comparable in all
material respects to those applied during the preceding comparable period. If
Borrower or Required Lenders

TERM LOAN AND SECURITY AGREEMENT

16

determine that a change in GAAP from that in effect on the date hereof has
altered the treatment of certain financial data to its detriment under this
Agreement, such party may, by written notice to the others and Administrative
Agent not later than ten days after the effective date of such change in GAAP,
request renegotiation of the financial covenants affected by such change. If
Borrower and Required Lenders have not agreed on revised covenants within 30
days after delivery of such notice, then, for purposes of this Agreement, GAAP
will mean generally accepted accounting principles on the date just prior to the
date on which the change that gave rise to the renegotiation occurred.

SECTION 2. TERM LOAN FACILITY. Each Lender severally, but not jointly, agrees to
restructure the claims of the Lenders in the Chapter 11 Case in accordance with
the terms of the Reorganization Plan in the amount of such Lender's Commitment
Percentage of $38,000,000. If all or any portion of the Term Loan Principal Debt
is paid or prepaid, then the amount so repaid may not be re-borrowed.

SECTION 3. TERMS OF PAYMENT.

3.1 LOAN ACCOUNTS, NOTES, AND PAYMENTS.

(a) Loan Accounts; Noteless Transaction. The Term Loan Principal
Debt owed to each Lender shall be evidenced by one or more loan accounts
or records maintained by such Lender in the ordinary course of business.
The loan accounts or records maintained by Administrative Agent and each
Lender shall be prima facie evidence absent manifest error of the amount
of the Term Loan made by Borrower from each Lender under this Agreement
and the interest and principal payments thereon. Any failure to so record
or any error in doing so shall not, however, limit or otherwise affect the
obligation of Loan Parties under the Loan Documents to pay any amount
owing with respect to the Obligation.

(b) Notes. Upon the request of any Lender, made through
Administrative Agent, the Principal Debt owed to such Lender may be
evidenced by a Term Loan Note. In such event, Borrower shall promptly
prepare, execute, and deliver to such Lender such Note payable to the
order of such Lender.

(c) Payment. All payments of principal, interest, and other amounts
to be made by Borrower under this Agreement and the other Loan Documents
shall be made to Administrative Agent via the following wiring
instructions:

Fleet Bank
ABA No. 021-200-339
For account of Mid River LLC
Account no. 94 293 82 604

in Dollars and in funds which are or will be available for immediate use
by Administrative Agent by 1:00 p.m., New York, New York time on the day due,
without setoff, deduction, or counterclaim. Payments made after 1:00 p.m., New
York, New York time shall be deemed made on the Business Day next following.
Administrative Agent shall pay to each Lender any payment of principal,
interest, or other amount to which such Lender is entitled hereunder on the same
day Administrative Agent shall have received the same from Borrower; provided
such payment is received by Administrative Agent prior to 1:00 p.m., New York,
New York time, and otherwise before 1:00 p.m., New York, New York time on the
Business Day next following.

(d) Payment Assumed. Unless Administrative Agent has received notice
from Borrower prior to the date on which any payment is due under this
Agreement that Borrower will

TERM LOAN AND SECURITY AGREEMENT

17

not make that payment in full, Administrative Agent may assume that
Borrower has made the full payment due and Administrative Agent may, in
reliance upon that assumption, cause to be distributed to the appropriate
Lender on that date the amount then due to such Lenders. If and to the
extent Borrower does not make the full payment due to Administrative
Agent, each Lender shall repay to Administrative Agent on demand the
amount distributed to that Lender by Administrative Agent together with
interest for each day from the date that Lender received payment from
Administrative Agent until the date that Lender repays Administrative
Agent (unless such repayment is made on the same day as such
distribution), at an annual interest rate equal to the Federal Funds Rate.

3.2 PAYMENTS. The principal of and accrued interest upon the Term Loan
Principal Debt shall be due and payable as follows:

(a) Interest, computed as stated below, shall be due and payable quarterly
as it accrues, commencing March 15, 2005, and thereafter, on the 15th day of
each succeeding June, September, December and March, and at maturity; and,

(b) Principal shall be due and payable (i) in twenty-seven (27) equal
quarterly installments, each in the amount of $1,357,142.86, commencing on March
15, 2005, and thereafter, on the 15th day of each succeeding June, September,
December and March, through and including September 15, 2011, and (ii) in one
final installment, on December 15, 2011, in the amount of the unpaid principal
balance of and accrued unpaid interest upon the Loan as of such date.

3.3 PREPAYMENTS. The Borrower shall have the right at any time and from
time to time to prepay any Borrowing in whole or in part. All such prepayments
shall be made, together with accrued interest to the date of such prepayment on
the principal amount prepaid.

3.4 INTEREST ACCRUAL. Except as otherwise provided in this Agreement, the
Term Loan Principal Debt bears interest at a rate per annum equal to the lesser
of (a) the Wall Street Journal LIBOR Daily Floating Rate plus four percent (4%)
and (b) the Maximum Rate. Each change in such per annum rate of interest,
subject to the terms of this Agreement, will become effective, without notice to
Borrower or any other Person, upon the effective date of such change.

3.5 POST-DEFAULT RATE. At the option of Required Lenders and to the extent
permitted by Law, all past-due Term Loan Principal Debt and past due interest
accruing on any of the Obligation shall bear interest from maturity (stated or
by acceleration) at the Post-Default Rate until paid; provided that, the
Post-Default Rate shall automatically apply in the case of SECTION 11.3 where
the Post-Default Rate is specified.

3.6 INTEREST RECAPTURE. If the designated rate applicable to any Borrowing
exceeds the Maximum Rate, the rate of interest on such Borrowing shall be
limited to the Maximum Rate, but any subsequent reductions in such designated
rate shall not reduce the rate of interest thereon below the Maximum Rate until
the total amount of interest accrued thereon equals the amount of interest which
would have accrued thereon if such designated rate had at all times been in
effect. In the event that at maturity (stated or by acceleration), or at final
payment of the Term Loan Principal Debt, the total amount of interest paid or
accrued is less than the amount of interest which would have accrued if such
designated rates had at all times been in effect, then, at such time and to the
extent permitted by Law, Borrower shall pay an amount equal to the difference
between (a) the lesser of the amount of interest which would have accrued if
such designated rates had at all times been in effect and the amount of interest
which would

TERM LOAN AND SECURITY AGREEMENT

18

have accrued if the Maximum Rate had at all times been in effect, and (b) the
amount of interest actually paid or accrued on the Term Loan Principal Debt.

3.7 INTEREST CALCULATIONS. Interest will be calculated on the basis of
actual number of days (including the first day but excluding the last day)
elapsed but computed as if each calendar year consisted of 360 days (unless the
calculation would result in an interest rate greater than the Maximum Rate, in
which event interest will be calculated on the basis of a year of 365 or 366
days, as the case may be). All interest rate determinations and calculations by
Administrative Agent are conclusive and binding absent manifest error.

3.8 MAXIMUM RATE. Regardless of any provision contained in any Loan
Document, neither Administrative Agent nor any Lender shall ever be entitled to
contract for, charge, take, reserve, receive, or apply, as interest on all or
any part of the Obligation, any amount in excess of the Maximum Rate, and, if
Lenders ever do so, then such excess shall be deemed a partial prepayment of
principal and treated hereunder as such and any remaining excess shall be
refunded to Borrower. In determining if the interest paid or payable exceeds the
Maximum Rate, Borrower and Lenders shall, to the maximum extent permitted under
applicable Law, (a) treat all Borrowings as but a single extension of credit,
(b) characterize any non-principal payment as an expense, fee, or premium rather
than as interest, (c) exclude voluntary prepayments and the effects thereof, and
(d) amortize, prorate, allocate, and spread the total amount of interest
throughout the entire contemplated term of the Obligation. However, if the
Obligation is paid and performed in full prior to the end of the full
contemplated term thereof, and if the interest received for the actual period of
existence thereof exceeds the Maximum Amount, Lenders shall refund such excess,
and, in such event, Lenders shall not, to the extent permitted by Law, be
subject to any penalties provided by any Laws for contracting for, charging,
taking, reserving, or receiving interest in excess of the Maximum Amount. If the
laws of the state of Texas are applicable for purposes of determining the
"Maximum Rate" or the "Maximum Amount," then those terms mean the "weekly
ceiling" from time to time in effect under Texas Finance Code Section 303.009,
as amended. Borrower agrees that Chapter 346 of the Texas Finance Code, as
amended (which regulates certain revolving credit loan accounts and revolving
tri-party accounts), does not apply to the Obligation.

3.9 APPLICATION OF PAYMENTS.

(a) No Default. If no Event of Default or Potential Default exists,
payments and prepayments shall be applied in the order and manner as
Borrower may direct.

(b) Default. If an Event of Default or Potential Default exists, any
payment or prepayment (including proceeds from the exercise of any Rights)
shall be applied to the Obligation in the following order: (i) to the
ratable payment of all fees, expenses, and indemnities for which
Administrative Agent or Lenders have not been paid or reimbursed in
accordance with the Loan Documents (as used in this SECTION 3.9(b), a
"ratable payment" for any Lender or Administrative Agent shall be, on any
date of determination, that proportion which the portion of the total
fees, expenses, and indemnities owed to such Lender or Administrative
Agent bears to the total aggregate fees and indemnities owed to all
Lenders and Administrative Agent on such date of determination); and (ii)
to the payment of the remaining Obligation in the order and manner
Required Lenders deem appropriate.

Subject to the provisions of SECTION 11 and provided that Administrative
Agent shall not in any event be bound to inquire into or to determine the
validity, scope, or priority of any interest or entitlement of any Lender and
may suspend all payments or seek appropriate relief (including, without
limitation, instructions from Required Lenders or an action in the nature of
interpleader) in the event of any doubt or

TERM LOAN AND SECURITY AGREEMENT

19

dispute as to any apportionment or distribution contemplated hereby,
Administrative Agent shall promptly distribute such amounts to each Lender in
accordance with the Agreement and the related Loan Documents.

3.10 SHARING OF PAYMENTS, ETC. If any Lender shall obtain any payment or
prepayment with respect to the Obligation (whether voluntary, involuntary, or
otherwise) which is in excess of its share of any such payment in accordance
with the relevant Rights of the Lenders under the Loan Documents, then such
Lender shall purchase from the other Lenders such participations as shall be
necessary to cause such purchasing Lender to share the excess payment with each
other Lender in accordance with the relevant Rights under the Loan Documents. If
all or any portion of such excess payment is subsequently recovered from such
purchasing Lender, then the purchase shall be rescinded and the purchase price
restored to the extent of such recovery. Borrower agrees that any Lender
purchasing a participation from another Lender pursuant to this SECTION 3.10
may, to the fullest extent permitted by Law, exercise all of its Rights of
payment (including the Right of offset) with respect to such participation as
fully as if such Lender were the direct creditor of Borrower in the amount of
such participation.

3.11 OFFSET. If an Event of Default exists, each Lender shall be entitled
to exercise (for the benefit of all Lenders) the Rights of offset and/or
banker's Lien against each and every account and other property, or any interest
therein, which any Borrower may now or hereafter have with, or which is now or
hereafter in the possession of, such Lender to the extent of the full amount of
the Obligation.

3.12 COLLECTION OF ACCOUNTS.

(a) Borrower (i) shall establish and maintain lock boxes
("LOCKBOXES") at one or more banks set forth on SCHEDULE 2.7, (ii) shall
request in writing and otherwise take such reasonable steps to ensure that
all Account Debtors forward payment directly to such Lockboxes, (iii)
shall and shall cause each of its Subsidiaries to instruct all Account
Debtors with respect to the Accounts, General Intangibles, and Negotiable
Collateral of such Borrower or such Subsidiary, as the case may be, to
remit all Collections in respect thereof to such Lockbox Account, and (iv)
shall, and shall cause each of its Subsidiaries to, deposit all other
Collections received by Borrower from any source immediately upon receipt
in to the Lockboxes. Borrower, each of Borrower's Subsidiaries,
Administrative Agent, and the Lockbox Banks shall enter into the Lockbox
Agreements, which among other things shall provide for the opening of a
Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower
agrees that all Collections and other amounts received by Borrower or any
of its Subsidiaries from any Account Debtor or any other source
immediately upon receipt shall be deposited into a Lockbox Account. No
Lockbox Agreement or arrangement contemplated thereby shall be modified by
Borrower or any of its Subsidiaries without the prior written consent of
Administrative Agent. Upon the terms and subject to the conditions set
forth in the Lockbox Agreements, all amounts received in each Lockbox
Account shall be wired each Business Day into the Administrative Agent's
Account; provided, however, that Administrative Agent reserves the right,
in its sole discretion, to require that any amounts received in a Lockbox
Account which may represent amounts attributable to trust funds (i.e.,
production taxes, severance taxes, or payroll taxes) or amounts
attributable to Hydrocarbon Interests of third Persons be segregated by
the Lockbox Bank and held in a separate account or otherwise as directed
by Administrative Agent.

(b) The Lockboxes, Collection Accounts and Designated Account shall
be cash collateral accounts, with all cash, checks and similar items of
payment in such accounts securing payment of the Obligations and all other
Indebtedness, and in which each Loan Party shall have granted a Lien to
Administrative Agent hereunder and pursuant to the other Loan Documents.

TERM LOAN AND SECURITY AGREEMENT

20

(c) Borrower shall and shall cause its Designated Affiliates,
officers, employees, agents, directors or other Persons acting for or in
concert with such Borrower (each a "RELATED PERSON") to (i) hold in trust
for Administrative Agent all checks, cash and other items of payment
received by Borrower or any such Related Person, and (ii) within one (1)
Business day after receipt by such Borrower or any Related Person of any
checks, cash or other items of payment, deposit the same into a Collection
Account of such Borrower. Each Borrower and each Related Person thereof
acknowledges and agrees that all cash, checks or items of payment
constituting proceeds of Collateral are the property of Administrative
Agent for the benefit of Lenders. All proceeds of the sale or other
disposition of any Collateral, shall be deposited directly into the
applicable Borrower Collection Account.

3.13 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any
Collections by Administrative Agent (whether from transfers to Administrative
Agent by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise)
immediately shall be applied provisionally to reduce the Obligations outstanding
under SECTION 2, but shall not be considered a payment on account unless such
Collection item is a wire transfer of immediately available federal funds and is
made to the Administrative Agent Account or unless and until such Collection
item is honored when presented for payment; provided, however, that
Administrative Agent reserves the right, in its sole discretion, to exclude from
such provisional reduction and payment the amount of any such Collections that
Administrative Agent determines may constitute trust funds (e.g., production
taxes, severance taxes, or payroll taxes) or amounts attributable to Hydrocarbon
Interests of third Persons. From and after the Closing Date, Administrative
Agent shall be entitled to charge Borrower for 1 Business Day of `clearance' or
`float' at the rate set forth in SECTION 3.4, on all Collections that are
received by the Lockbox Banks or Administrative Agent (regardless of whether
forwarded by the Lockbox Banks to Administrative Agent, whether provisionally
applied to reduce the Obligations under SECTION 2, or otherwise). This
across-the-board 1 Business Day clearance or float charge on all Collections is
acknowledged by the parties to constitute an integral aspect of the pricing of
the Lender Group's financing of Borrower, and shall apply irrespective of the
characterization of whether receipts are owned by Borrower or Administrative
Agent, and whether or not there are any outstanding Advances, the effect of such
clearance or float charge being the equivalent of charging 1 Business Day of
interest on such Collections. Should any Collection item not be honored when
presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any Collection item shall be deemed
received by Administrative Agent only if it is received into the Administrative
Agent Account on a Business Day on or before 2:00 p.m. New York time. If any
Collection item is received into the Administrative Agent Account on a
non-Business Day or after 2:00 p.m. New York time on a Business Day, it shall be
deemed to have been received by Administrative Agent as of the opening of
business on the immediately following Business Day. Anything contained herein to
the contrary notwithstanding, the economic benefit of the 1 Business Day
clearance or float charge provided for in this SECTION 3.13 is not for the
ratable benefit of the Lenders, but instead shall be for the sole and separate
account of Administrative Agent.

SECTION 4. TAXES.

4.1 GENERAL. Any and all payments by Borrower to or for the account of any
Lender or Administrative Agent hereunder or under any other Loan Document shall
be made free and clear of and without deduction for any and all present or
future taxes, excluding, in the case of each Lender and Administrative Agent,
taxes imposed on its income and franchise Taxes imposed on it by the
jurisdiction under the Laws of which such Lender (or its Applicable Lending
Office) or Administrative Agent (as the case may be) is organized or the
jurisdiction in which the principal office or the Applicable Lending

TERM LOAN AND SECURITY AGREEMENT

21

Office of such Lender or Administrative Agent is located, or any political
subdivision thereof (all such non-excluded taxes, referred to herein as
"TAXES"). If Borrower shall be required by Law to deduct any Taxes from or in
respect of any sum payable under any Loan Document to any Lender or
Administrative Agent, (i) the sum payable shall be increased as necessary so
that after making all required deductions (including deductions applicable to
additional sums payable under this SECTION 4.1) such Lender or Administrative
Agent receives an amount equal to the sum it would have received had no such
deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable Law, and (iv) Borrower shall furnish to
Administrative Agent, the original or a certified copy of a receipt evidencing
payment thereof.

4.2 STAMP AND DOCUMENTARY TAXES. In addition, Borrower agrees to pay any
and all present or future stamp or documentary taxes and any other excise or
property taxes or charges or similar levies which arise from any payment made
under any Loan Document or from the execution or delivery of, or otherwise with
respect to, any Loan Document (hereinafter referred to as "OTHER TAXES").

4.3 INDEMNIFICATION FOR TAXES. Borrower agrees to indemnify each Lender
and Administrative Agent for the full amount of Taxes and Other Taxes
(including, without limitation, any Taxes or Other Taxes imposed or asserted by
any jurisdiction on amounts payable under this SECTION 4) paid by such Lender or
Administrative Agent (as the case may be) and any liability (including
penalties, interest, and expenses) arising therefrom or with respect thereto.

4.4 CHANGES IN APPLICABLE LENDING OFFICE. If Borrower is required to pay
or will be required to pay additional amounts to or for the account of any
Lender pursuant to this SECTION 4.4, then such Lender will agree to use
reasonable efforts to change the jurisdiction of its Applicable Lending Office
so as to eliminate or reduce any such additional payment which may thereafter
accrue if such change, in the judgment of such Lender, is not otherwise
disadvantageous to such Lender.

4.5 SURVIVAL. Without prejudice to the survival of any other agreement of
Borrower hereunder, the agreements and obligations of Borrower contained in this
SECTION 4 shall survive the payment in full of the Obligation.

SECTION 5. SECURITY.

5.1 COLLATERAL. To secure the full and complete payment and performance of
the Obligation, Borrower shall enter into Collateral Documents (in form and
substance acceptable to Administrative Agent) pursuant to which, among other
things, Borrower shall grant, pledge, assign, and create first priority Liens in
favor of Administrative Agent (for the ratable benefit of Lenders) in and to all
of the Borrower's assets including (but not limited to): (i) the Oil and Gas
Properties and (ii) the Personal Property Collateral.

5.2 GRANT OF SECURITY INTEREST IN PERSONAL PROPERTY COLLATERAL. Borrower
hereby grants to Administrative Agent, for the benefit of the Lenders, a
continuing security interest in all of its right, title, and interest in all
currently existing and hereafter acquired or arising Personal Property
Collateral in order to secure prompt repayment of any and all of the Obligations
in accordance with the terms and conditions of the Loan Documents and in order
to secure prompt performance by Borrower of each of its covenants and duties
under the Loan Documents. Administrative Agent's Liens in and to the Personal
Property Collateral shall attach to all Personal Property Collateral without
further act on the part of Administrative Agent or Borrower. Anything contained
in this Agreement or any other Loan Document

TERM LOAN AND SECURITY AGREEMENT

22

to the contrary notwithstanding, except for dispositions permitted by SECTION
9.5, Borrower has no authority, express or implied, to dispose of any item or
portion of the Collateral.

5.3 NEGOTIABLE COLLATERAL AND CHATTEL PAPER. Borrower covenants and agrees
with Lenders that from and after the Closing Date and until the date of
termination of this Agreement:

(a) In the event that any Collateral, including proceeds, is
evidenced by or consists of Negotiable Collateral, and if and to the
extent that perfection or priority of Administrative Agent's security
interest with respect to such Collateral is dependent on or enhanced by
possession, Borrower, immediately upon the request of Administrative
Agent, shall endorse and deliver physical possession of such Negotiable
Collateral to Administrative Agent;

(b) Borrower shall take all steps reasonably necessary to grant
Administrative Agent control of all electronic Chattel Paper in accordance
with the Code and all "transferable records" as defined in each of the
Uniform Electronic Transactions Act and the Electronic Signatures in
Global and National Commerce Act; and

(c) In the event Borrower, with Administrative Agent's consent,
retains possession of any Chattel Paper or instruments otherwise required
to be endorsed and delivered to Administrative Agent pursuant to SECTION
5.3(a), all of such Chattel Paper and instruments shall be marked with the
following legend: "This writing and the obligations evidenced or secured
thereby are subject to the security interest of Mid River LLC, as
Administrative Agent."

5.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower authorizes
Administrative Agent to file, transmit, or communicate, as applicable, UCC
financing statements, in-lieu financing statements and amendments describing the
Personal Property Collateral as "all personal property of debtor" or "all assets
of debtor" or words of similar effect, in order to perfect Administrative
Agent's Liens on the Personal Property Collateral without Borrower's signature.
Notwithstanding the foregoing, at any time upon the request of Administrative
Agent, Borrower shall execute (or cause to be executed) and deliver to
Administrative Agent, any and all financing statements, original financing
statements in lieu of continuation statements, fixture filings, security
agreements, pledges, assignments, endorsements of certificates of title, and all
other documents (the "ADDITIONAL DOCUMENTS") upon which Borrower's signature may
be required that Administrative Agent may request, in form and substance
satisfactory to Administrative Agent, to perfect and continue perfected or
better perfect Administrative Agent's Liens in the Collateral (whether now owned
or hereafter arising or acquired), to create and perfect Liens in favor of
Administrative Agent in any Collateral (including, but not limited to, Oil and
Gas Property) acquired after the Closing Date, and in order to fully consummate
all of the transactions contemplated hereby and under the other Loan Documents.
To the maximum extent permitted by applicable law, Borrower authorizes
Administrative Agent to execute any such Additional Documents in Borrower's name
and authorizes Administrative Agent to file such executed Additional Documents
in any appropriate filing office. Borrower also hereby ratifies its
authorization for Administrative Agent to have filed in any jurisdiction any
financing statements or amendments thereto if filed prior to the date hereof.
Borrower shall not terminate, amend or file a correction statement with respect
to any Code financing statement filed pursuant to this SECTION 5.4 without
Administrative Agent's prior written consent. In addition, on such periodic
basis as Administrative Agent shall require, Borrower shall (a) provide
Administrative Agent with a report of all new patentable, copyrightable, or
trademarkable materials acquired or generated by Borrower during the prior
period, (b) cause all patents, copyrights, and trademarks acquired or generated
by Borrower that are not already the subject of a registration with the
appropriate filing office (or an application therefor diligently prosecuted) to
be registered with such appropriate filing office in a manner sufficient to
impart constructive notice of Borrower's ownership thereof, and (c) cause to be
prepared, executed, and delivered to Administrative Agent supplemental schedules
to the applicable Loan

TERM LOAN AND SECURITY AGREEMENT

23

Documents to identify such patents, copyrights, and trademarks as being subject
to the security interests created thereunder. Borrower grants Administrative
Agent a power-of-attorney, irrevocable so long as this Agreement is in
existence, to amend SCHEDULE P to include any Proprietary Rights including (but
not limited to) future Trademarks.

5.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes, constitutes, and
appoints Administrative Agent (and any of Administrative Agent's officers,
employees, or agents designated by Administrative Agent) as Borrower's true and
lawful attorney, with power to (a) if Borrower refuses to, or fails timely to
execute and deliver any of the documents described in SECTION 5.4, sign the name
of Borrower on any of the documents described in SECTION 5.4, (b) sign
Borrower's name on any invoice or bill of lading relating to the Collateral,
drafts against Account Debtors, or notices to Account Debtors, (c) send requests
for verification of Accounts, (d) endorse Borrower's name on any Collection item
that may come into the Lender Group's possession, (e) make, settle, and adjust
all claims under Borrower's policies of insurance and make all determinations
and decisions with respect to such policies of insurance, and (f) settle and
adjust disputes and claims respecting the Accounts, Chattel Paper, or General
Intangibles directly with Account Debtors, for amounts and upon terms that
Administrative Agent determines to be reasonable, and Administrative Agent may
cause to be executed and delivered any documents and releases that
Administrative Agent determines to be necessary. The appointment of
Administrative Agent as Borrower's attorney, and each and every one of its
rights and powers, being coupled with an interest, is irrevocable until all of
the Obligations have been fully and finally repaid and performed and the Lender
Group's obligations to extend credit hereunder are terminated.

5.6 RIGHT TO VERIFY ACCOUNTS. Administrative Agent may, without expense to
Administrative Agent, use such of Borrower's respective personnel, supplies,
properties, premises and assets as Administrative Agent deems to be reasonably
necessary for maintaining or enforcing Administrative Agent's Liens.

5.7 RIGHT TO INSPECT PROPERTIES AND BOOKS AND RECORDS; COMMUNICATION WITH
ACCOUNTANTS. Administrative Agent and Lenders may (at the expense of Borrower)
visit and inspect any of Borrower's properties, examine its corporate, financial
and operating records, and make copies thereof or abstracts therefrom and to
discuss its affairs, finances and accounts with its directors, officers and
independent public accountants at such reasonable times during normal business
hours and as soon as may be reasonably desired, upon reasonable advance notice
to Borrower; provided, however, when a Event of Default or Potential Default
exists, Administrative Agent or any Lender may do any of the foregoing at the
expense of Borrower at any time during normal business hours and without advance
notice.

5.8 RIGHT TO INSPECT COLLATERAL. Administrative Agent and each Lender
(through any of their respective officers, employees, or agents) shall have the
right, from time to time hereafter to inspect the Books and to make copies or
abstracts thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, quality, value, condition
of, or any other matter relating to, the Collateral or any portion thereof.

5.9 RIGHT TO REQUIRE COLLATERAL APPRAISALS. Whenever a Event of Default or
Potential Default exists, and at such other times not more frequently than once
per calendar year as Administrative Agent or the Lenders may request,
Administrative Agent may request (at Borrower's expense) that Borrower provide
Administrative Agent and the Lenders with appraisals or updates thereof of all
or any material portion of the Collateral (including, without limitation,
Collateral consisting of Inventory or Equipment) from an appraiser, and prepared
on a basis, satisfactory to Administrative Agent and Lenders,

TERM LOAN AND SECURITY AGREEMENT

24

such appraisals and updates to include, without limitation, information required
by applicable law and regulation and by the internal policies of the Lenders.

5.10 CONTROL AGREEMENTS. Borrower agrees that it will not transfer assets
out of any Securities Accounts and, if to another securities intermediary,
unless each of Borrower, Administrative Agent, and the substitute securities
intermediary have entered into a Control Agreement. No arrangement contemplated
hereby or by any Control Agreement in respect of any Securities Accounts or
other Investment Property shall be modified by Borrower without the prior
written consent of Administrative Agent. Upon the occurrence and during the
continuance of a Event of Default or Potential Default, Administrative Agent may
notify any securities intermediary to liquidate the applicable Securities
Account or any related Investment Property maintained or held thereby and remit
the proceeds thereof to Administrative Agent's Account.

5.11 GRANT OF LICENSE TO USE PROPRIETARY RIGHTS. For the purpose of
enabling Administrative Agent to exercise rights and remedies under SECTION 11
hereof (including, without limitation, in order to take possession of, hold,
preserve, process, assemble, prepare for sale, market for sale, sell or
otherwise dispose of Collateral) at such time as Administrative Agent shall be
lawfully entitled to exercise such rights and remedies, Borrower hereby grants
to Administrative Agent, for the benefit of Administrative Agent and the
Lenders, exercisable solely upon the occurrence and during the continuance of a
Event of Default an irrevocable, nonexclusive license (exercisable without
payment of royalty or other compensation to Borrower) to use, license or
sublicense any Proprietary Rights now owned or hereafter acquired by Borrower,
and wherever the same may be located, and including in such license access to
all media in which any of the licensed items may be recorded or stored and to
all computer software and programs used for the compilation or printout thereof.

5.12 COMMERCIAL TORT CLAIMS. Borrower shall promptly notify Administrative
Agent in writing in the event Borrower shall incur or otherwise obtain a
Commercial Tort Claim in excess of $100,000 after the Closing Date against any
third party and, upon the request of Administrative Agent, shall promptly amend
SCHEDULE C, authorize the filing of additional UCC financing statements or
amendments to existing UCC financing statements, and do such other acts or
things deemed necessary or desirable by Administrative Agent to grant
Administrative Agent a first priority, perfected security interest in any such
Commercial Tort Claim.

5.13 LETTERS IN LIEU/POWER OF ATTORNEY.

(a) Borrower shall provide to Administrative Agent undated letters,
in the form of EXHIBIT D attached hereto, from Borrower in blank to each
purchaser of production and disburser of proceeds of production from or
attributable to the Mortgaged Properties, with the addressees left blank,
authorizing and directing the addressees to make future payments
attributable to production from the Mortgaged Properties directly to
Administrative Agent for the ratable benefit of the Banks.

(b) Borrower hereby designates Administrative Agent as its agent and
attorney-in-fact, to act in their name, place, and stead for the purpose
of completing and delivering any and all of the letters in lieu of
transfer orders delivered by Borrower to Administrative Agent, including,
without limitation, completing any blanks contained in such letter and
attaching exhibits thereto describing the relevant Collateral. The
Borrower hereby ratifies and confirms all that Administrative Agent shall
lawfully do or cause to be done by virtue of this power of attorney and
the rights granted with respect to such power of attorney. This power of
attorney is coupled with the interest of Administrative Agent in the
Collateral, shall commence and be in full

TERM LOAN AND SECURITY AGREEMENT

25

force and effect as of the Closing Date and shall remain in full force and
effect and shall be irrevocable so long as any Obligation remains
outstanding or unpaid. The powers conferred on Administrative Agent by
this appointment are solely to protect the interests of Administrative
Agent and each of the Lenders under the Loan Documents and shall not
impose any duty upon Administrative Agent to exercise any such powers.
Administrative Agent shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers and shall not
be responsible to Borrower or any other Person for any act or failure to
act with respect to such powers, except for gross negligence or willful
misconduct.

5.14 ASSIGNMENT OF RUNS. Notwithstanding that, under Section V of the
Mortgages, Borrower has assigned to Administrative Agent for the ratable benefit
of the Lenders all of the proceeds of runs accruing to the Mortgaged Properties
covered thereby:

(a) Until such time as Administrative Agent shall notify Borrower to
the contrary, Borrower shall be entitled to receive from the purchasers or
disbursers of production all such proceeds of runs, subject however to the
liens created under the Mortgages, which liens are hereby affirmed and
ratified. Upon the occurrence and during the continuance of a Potential
Default or such other time as Administrative Agent shall in its discretion
so elect, Administrative Agent may deliver to the addressees the
letters-in-lieu described in SECTION 5.13 above and may exercise all
rights and remedies granted under the Mortgages, including the right to
obtain possession of all proceeds of runs then held by Borrower or to
receive directly from the purchaser or disburser of production all other
proceeds of runs.

(b) In no case shall any failure, whether purposed or inadvertent,
by Administrative Agent to collect directly any such proceeds of runs
constitute in any way a waiver, remission or release of any of its rights
under the Mortgages, nor shall any release of any other proceeds of runs
or of any rights of Administrative Agent to collect other proceeds of runs
thereafter.

(c) Borrower will upon the instruction of Administrative Agent join
with Administrative Agent in notifying in writing and accompanied (if
necessary) by certified copies of the Mortgages the purchasers or
disbursers of production produced from the Mortgaged Properties of the
existence of the Mortgages, and instructing that all proceeds of runs be
paid directly to Administrative Agent for the ratable benefit of the
Banks.

SECTION 6. CONDITIONS PRECEDENT TO CLOSING.

This Agreement shall not become effective, and Lenders shall not be
obligated to advance any Term Loan Principal Debt, unless Administrative Agent
has received all of the agreements, documents, instruments, and other items
described on SCHEDULE 6. Each condition precedent in this Agreement is material
to the transactions contemplated in this Agreement, and time is of the essence
in respect of each thereof.

SECTION 7. REPRESENTATIONS AND WARRANTIES.

Each Loan Party represents and warrants to each Lender that the following
statements are and will be true and correct, and, unless specifically limited,
shall remain so until indefeasible payment in full, in cash, of the Obligation.

7.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS, AND
SUBSIDIARIES.

TERM LOAN AND SECURITY AGREEMENT

26

(a) Organization and Powers. Borrower is a corporation duly
organized and validly existing under the Laws of the State of Delaware and
has all requisite corporate or partnership (as applicable) power and
authority to own and operate its properties, to carry on its business as
now conducted and as proposed to be conducted, to enter into the Loan
Documents, to carry out the transactions contemplated thereby and pay the
Obligation and to grant to Administrative Agent Liens upon and security
interests in the Collateral.

(b) Qualification and Good Standing. Borrower is qualified to do
business and in good standing, in every jurisdiction where its assets are
located and wherever necessary to carry out its business and operations,
except in jurisdictions where the failure to be so qualified or in good
standing has not had and will not have a Material Adverse Effect.

(c) Conduct of Business. Borrower and its Subsidiaries are engaged
only in the businesses permitted to be engaged in pursuant to SECTION
9.10.

(d) Borrower and Subsidiaries. All of the Subsidiaries of Borrower
as of the Closing Date are identified in SCHEDULE 7.1. The capital stock
or other equity interests of each of the Subsidiaries of Borrower
identified in SCHEDULE 7.1 is duly authorized, validly issued, fully paid,
and nonassessable and none of such capital stock or other equity interests
constitutes Margin Stock. Borrower and each of the Subsidiaries of
Borrower identified in SCHEDULE 7.1 are duly organized, validly existing,
and in good standing under the laws of their respective jurisdictions of
organization set forth therein, has full corporate power and authority to
own their assets and properties and to operate their business as presently
owned and conducted and as proposed to be conducted, and are qualified to
do business and in good standing in every jurisdiction where their assets
are located and wherever necessary to carry out their business and
operations, in each case except where failure to be so qualified or in
good standing or a lack of such corporate power and authority has not had
and will not have a Material Adverse Effect. SCHEDULE 7.1 correctly sets
forth the ownership interest of Borrower in each of its Subsidiaries
identified therein.

7.2 AUTHORIZATION OF BORROWING, ETC.

(a) Authorization of Borrowing. The execution, delivery and
performance of the Loan Documents and the issuance, delivery, and payment
of the Obligation have been duly authorized by all necessary corporate
and/or partnership (as applicable) action on the part of each of the Loan
Parties party thereto.

(b) No Conflict. After giving effect to the consummation of the
transactions contemplated hereby to occur on the Closing Date, the
execution, delivery, and performance by each of the applicable Loan
Parties of the Loan Documents, the issuance, delivery, and payment of the
Obligation, and the consummation of the transactions contemplated by the
Loan Documents do not and will not (i) violate any provision of any Law or
any governmental rule or regulation applicable to any Loan Party, the
Certificate or Articles of Incorporation or Bylaws (or other analogous
organizational document) of any Loan Party, or any order, judgment, or
decree of any Governmental Authority binding on any Loan Party, (ii)
conflict with, result in a breach of, or constitute (with due notice or
lapse of time or both) a default under any Contractual Obligation of any
Loan Party, (iii) result in or require the creation or imposition of any
Lien upon any of the properties or assets of any Loan Party (other than
any Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require any approval
of stockholders or any approval or consent of any Person under any
Contractual Obligation of any Loan Party, except for such approvals or
consents which will be obtained on or before the Closing Date and
disclosed in writing to Lenders.

TERM LOAN AND SECURITY AGREEMENT

27

(c) Governmental Consents. The execution, delivery, and performance
by the Loan Parties of the Loan Documents, the issuance, delivery, and
payment of the Obligation, and the consummation of the transactions
contemplated by the Loan Documents do not and will not require any
registration with, consent or approval of, or notice to, or other action
to, with, or by, any federal, state, or other Governmental Authority
except to the extent obtained on or before the Closing Date other than
filings and recordings necessary to perfect the Liens in the Collateral.

(d) Binding Obligation. Each of the Loan Documents has been duly
executed and delivered by each of the Loan Parties party thereto and is
the legally valid and binding obligation of each such Loan Party,
enforceable against such Loan Party in accordance with its respective
terms, except as may be limited by bankruptcy, insolvency, reorganization,
moratorium, or similar Laws relating to or limiting creditors' rights
generally or by equitable principles relating to enforceability.

7.3 COLLATERAL AND SECURITY INTERESTS

(a) Collateral Documents. The security interests created in favor of
Administrative Agent under this Agreement and the other Loan Documents
will at all times from and after the Closing Date constitute, as security
for the Obligation, a legal, valid, and enforceable security interest in
and Lien on all of the Collateral referred to therein in favor of
Administrative Agent for the benefit of the Lenders subject only to
Permitted Liens. No consents, filings, or recordings are required in order
to perfect (or maintain the perfection or priority of) the security
interests purported to be created by any of the Collateral Documents,
other than such as have been obtained and which remain in full force and
effect and UCC financing statements, and periodic UCC continuation filings
or as is specifically otherwise permitted by the terms of any applicable
Collateral Document.

(b) Accounts. The Accounts are bona fide existing payment
obligations of Account Debtors created by the sale and delivery of
Inventory or the rendition of services to such Account Debtors in the
ordinary course of Borrower's business, owed to Borrower without known
defenses, disputes, offsets, counterclaims, or rights of return or
cancellation.

(c) Inventory. All Inventory (excluding obsolete Inventory) is of
good and merchantable quality, free from defects.

(d) Equipment. All of the Equipment, excluding the Discontinued
Assets, is used or held for use in Borrower's business and is fit for such
purposes.

(e) Location of Inventory and Equipment. The Inventory and Equipment
are not stored with a bailee, warehouseman, or similar party and are
located only at the locations identified on SCHEDULE 7.2 or otherwise
permitted by SECTION 9.4, except for Inventory and Equipment which:

(i) are located on the Oil and Gas Properties;

(ii) are in-transit for delivery in the ordinary course of
business to Borrower from Borrower's suppliers or to
Borrower's Oil and Gas Properties;

(iii) are located in Texas, Louisiana, Mississippi or Alabama
(or in the Federal Outer Continental Shelf and adjacent to any
such state in-transit in the ordinary course of business
between Borrower's Oil and Gas Properties);

TERM LOAN AND SECURITY AGREEMENT

28

(iv) consist of well pipe being coated in the ordinary course
of business by a processor for Borrower; and

(v) or have a value of less than $50,000 for all such
Inventory and Equipment.

(f) Location of Chief Executive Office; FEIN; Organizational ID
Number. Set forth on SCHEDULE 7.2 are (a) the address of Borrower's chief
executive office, (b) Borrower's FEIN, and (c) Borrower's Organizational
ID Number issued by its state of incorporation.

(g) Natural Gas Act or the Natural Gas Policy Act of 1978. Neither
the Borrower nor any of its Subsidiaries has violated, and neither the
Borrower, nor any Subsidiary will be in violation of, any provisions of
the Natural Gas Act or the Natural Gas Policy Act of 1978 or any other
Federal or State law or any of the regulations thereunder (including those
of the respective Conservation Commissions and Land Offices of the various
jurisdictions having authority over its Oil and Gas Properties) with
respect to its Oil and Gas Properties which would create a Material
Adverse Effect, and the Borrower and each Subsidiary have or will have
made all necessary rate filings, certificate applications, well category
filings, interim collection filings and notices, and any other filings or
certifications, and has or will have received all necessary regulatory
authorizations (including without limitation necessary authorizations, if
any, with respect to any processing arrangements conducted by it or others
respecting its Oil and Gas Properties or production therefrom) required
under said laws and regulations with respect to all of its Oil and Gas
Properties or production therefrom so as not to create a Material Adverse
Effect. To the best of the Borrower's knowledge, said material rate
filings, certificate applications, well category filings, interim
collection filings and notices, and other filings and certifications
contain no untrue statements of material facts nor do they omit any
statements of material facts necessary in said filings.

(h) Trademark Collateral.

(i) The Trademarks are subsisting and have not been adjudged
invalid or unenforceable in whole or in part;

(ii) To the best of Borrower's knowledge, each of the
Trademarks is valid and enforceable;

(iii) To the best of Borrower's knowledge, there is no
outstanding claim that the use of any of the Trademarks violates the
rights of any third person;

(iv) Borrower is the sole and exclusive owner of the entire
and unencumbered fight, title and interest in and to each of the
Trademarks, free and clear of any liens, charges and encumbrances,
except Permitted Liens (including without limitation pledges,
assignments, licenses, registered user agreements and covenants by
Borrower not to sue third persons), except for the Licenses referred
to in SCHEDULE P attached hereto; and

(v) Borrower has used, and will continue to use for the
duration of this Agreement, proper statutory notice, where
appropriate, in connection with its use of the Trademarks.

TERM LOAN AND SECURITY AGREEMENT

29

7.4 FINANCIAL CONDITION. Throughout the Chapter 11 Case, Borrower has
delivered to Administrative Agent, monthly unaudited balance sheets and
income statements, the most recent of which is dated as of September 30,
2004. All such statements were prepared in good-faith, based on sound
business accounting procedures, and fairly present, in all material
respects, the financial condition of the entities described in such
financial statements as at the respective dates thereof and the results of
operations of the entities described therein for each of the periods then
ended, subject, to changes resulting from audit and normal year-end
adjustments and the absence of footnote disclosure required in accordance
with GAAP. Neither Borrower nor any of its Subsidiaries has (and will not
immediately following the closing of the transactions contemplated by this
Agreement) any contingent liability or liability for taxes, long-term
lease, or unusual forward or long-term commitment that is not reflected in
the most recent financial statements delivered pursuant to SECTION 8.1,
the notes thereto and which in any such case is material in relation to
the business, operations, properties, assets, condition (financial or
otherwise), or prospects of Borrower and its Subsidiaries taken as a
whole.

7.5 TITLE TO COLLATERAL.

(a) Borrower's books and records reflect that Borrower has good,
marketable and indefeasible title to the Collateral, free and clear of all
Liens (except for Permitted Liens), including but not limited to:

(i) Ownership of the Oil and Gas Properties listed on SCHEDULE
7.5(a)(i);

(ii) The amount of the Net Revenue Interest of the Oil and Gas
Properties, as set forth on SCHEDULE 7.5(a)(ii);

(iii) All rights under the Material Contracts listed on
SCHEDULE 7.5(a)(iii); and

(iv) Ownership of the Real Property, to the extent stated on
SCHEDULE 7.5(a)(iv).

(b) All material leases and agreements necessary for the conduct of
the business of the Borrower and the Subsidiaries are valid and
subsisting, in full force and effect, and there exists no default or event
or circumstance which with the giving of notice or the passage of time or
both would give rise to a default under any such lease or leases.

(c) The rights and Properties presently owned, leased or licensed by
the Borrower and the Subsidiaries including, without limitation, all
easements and rights of way, include all rights and Properties necessary
to permit the Borrower and the Subsidiaries to conduct their business in
all material respects in the same manner as its business has been
conducted prior to the date hereof.

(d) All of the Properties of the Borrower and the Subsidiaries which
are reasonably necessary for the operation of their businesses are in good
working condition and are maintained in accordance with prudent business
standards.

(e) The Borrower and each Subsidiary owns, or is licensed to use,
all trademarks, tradenames, copyrights, patents and other intellectual
Property material to its business, and the use thereof by the Borrower and
such Subsidiary does not infringe upon the rights of any other Person,
except for any such infringements that, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect.
The Borrower and its Subsidiaries

TERM LOAN AND SECURITY AGREEMENT

30

either own or have valid licenses or other rights to use all databases,
geological data, geophysical data, engineering data, seismic data, maps,
interpretations and other technical information used in their businesses
as presently conducted, subject to the limitations contained in the
agreements governing the use of the same, which limitations are customary
for companies engaged in the business of the exploration and production of
Hydrocarbons, with such exceptions as could not reasonably be expected to
have a Material Adverse Effect.

7.6 PROVED RESERVES; OWNERSHIP OF OIL AND GAS PROPERTIES.

(a) Borrower's books and records reflect the following: (i) Borrower
has fee simple legal title to or valid leasehold interest in (in each
case, good marketable and indefeasible, except for Permitted Liens) to all
Proved Reserves, and of which Borrower is the beneficial owner of, to the
full extent of the quantity of interest specified in the most recent
Reserve Report delivered to Administrative Agent by Borrower, and all of
the information with respect thereto contained on SCHEDULES 7.5(a)(i),
7.5(a)(ii), 7.5(a)(iii), 7.6(e) and 7.7 with respect thereto is true and
correct; (ii) all Hydrocarbon Interests of which the Proved Reserves are a
part are in full force and effect and Borrower is in full compliance with
its obligations thereunder; (iii) all wells drilled and Hydrocarbons
produced with respect to such Proved Reserves were drilled and produced in
compliance with all applicable regulations; (iv) there are no outstanding
authorizations for expenditures with respect to any Proved Reserves which
are not reflected in the most recent Reserve Report delivered by Borrower
to Administrative Agent; and (v) all of such Proved Reserves are a part of
the Oil and Gas Properties described in SCHEDULE 7.5(a)(i), are covered by
the engineering reports which Borrower has previously delivered to and
which have been relied upon by Administrative Agent in connection with
this Agreement, and are part of the Oil and Gas Properties covered by the
Mortgages.

(b) Borrower's books and records reflect that Borrower has fee
simple legal title to or valid leasehold interest in (in each case, good,
marketable and indefeasible, except for Permitted Liens) to all Proved
Developed Producing Reserves, and of which Borrower is the beneficial
owner of, to the full extent of the quantity of interest specified in the
most recent Reserve Report delivered to Administrative Agent by Borrower,
and all of the information with respect thereto contained on SCHEDULES
7.5(a)(i), 7.5(a)(ii), 7.5(a)(iii), 7.6(e) AND 7.7 is true and correct.

(c) Borrower's books and records reflect that Borrower has fee
simple legal title to or valid leasehold interest in, (in each case, good
marketable and indefeasible, except for Permitted Liens all Proved
Developed Non-Producing Reserves), and of which Borrower is the beneficial
owner of, to the full extent of the quantity of interest specified in the
most recent Reserve Report delivered to Administrative Agent by Borrower,
and all of the information with respect thereto contained on SCHEDULES
7.5(a)(i), 7.5(a)(ii), 7.5(a)(iii), 7.6(e) AND 7.7 is true and correct.

(d) Borrower's books and records reflect that Borrower has fee
simple legal title to or valid leasehold interest in (in each case, good,
marketable and indefeasible, except for Permitted Liens to all Proved
Undeveloped Reserves), and of which Borrower is the beneficial owner of,
to the full extent of the quantity of interest specified in the most
recent Reserve Report delivered to Administrative Agent by Borrower, and
all of the information with respect thereto contained on SCHEDULES
7.5(a)(i), 7.5(a)(ii), 7.5(a)(iii), 7.6(e) AND 7.7 is true and correct.

(e) All of Borrower's marketing arrangements with respect to its
Proved Reserves are valid, enforceable and in full force and effect.
Except as disclosed on SCHEDULE 7.6(e), there

TERM LOAN AND SECURITY AGREEMENT

31

do not exist any gas imbalances, take or pay or other prepayments which
would require the Borrower or any of its Subsidiaries to deliver
Hydrocarbons produced from the Oil and Gas Properties at some future time
without then or thereafter receiving full payment therefor exceeding
50mmcf equivalent in the aggregate.

(f) Borrower's books and records reflect that, without limiting the
foregoing, after giving full effect to the Permitted Liens, Borrower owns
the net revenue interests in production attributable to the Oil and Gas
Properties covered by the Mortgages as is reflected in the most recently
delivered Reserve Report and the ownership of such Properties shall not in
any material respect obligate Borrower to bear the costs and expenses
relating to the maintenance, development and operations of each such
Property in an amount in excess of the working interest of each such
Property set forth in the most recently delivered Reserve Report. All
information contained in the most recently delivered Reserve Report is
true and correct in all material respects as of the date thereof.

(g) There has not been any Material Adverse Effect in the Oil and
Gas Properties since the date of the most recent Reserve Report.

7.7 OPERATIONS OF OIL AND GAS PROPERTIES. With respect to each Hydrocarbon
Interest which is a working interest, Borrower is the operator except as set
forth on SCHEDULE 7.7.

7.8 MAINTENANCE OF PROPERTIES. The Oil and Gas Properties (and Properties
unitized therewith) have been maintained, operated and developed in a good and
workmanlike manner and in conformity with all Government Requirements and in
conformity with the provisions of all leases, subleases or other contracts
comprising a part of the Hydrocarbon Interests and other contracts and
agreements forming a part of the Oil and Gas Properties. Specifically in
connection with the foregoing, (i) no Oil and Gas Property is subject to having
allowable production reduced below the full and regular allowable (including the
maximum permissible tolerance) because of any overproduction (whether or not the
same was permissible at the time) and (ii) none of the wells comprising a part
of the Oil and Gas Properties (or Properties unitized therewith) is deviated
from the vertical more than the maximum permitted by Government Requirements,
and such wells are, in fact, bottomed under and are producing from, and the well
bores are wholly within, the Oil and Gas Properties (or in the case of wells
located on Properties unitized therewith, such unitized Properties). All
pipelines, wells, gas processing plants, platforms and other material
improvements, fixtures and equipment owned in whole or in part by the Borrower
or any of its Subsidiaries that are necessary to conduct normal operations are
being maintained in a state adequate to conduct normal operations, and with
respect to such of the foregoing which are operated by the Borrower or any of
its Subsidiaries, in a manner consistent with the Borrower's or its
Subsidiaries' past practices.

7.9 MARKETING OF PRODUCTION. Except for contracts disclosed in writing to
the Administrative Agent or included in the most recently delivered Reserve
Report (with respect to all of which contracts the Borrower represents that it
or its Subsidiaries are receiving a price for all production sold thereunder
which is computed substantially in accordance with the terms of the relevant
contract and are not having deliveries curtailed substantially below the subject
Property's delivery capacity), no material agreements exist which are not
cancelable on 30 days notice or less without penalty or detriment for the sale
of production from the Borrower's or its Subsidiaries' Hydrocarbons (including,
without limitation, calls on or other rights to purchase, production, whether or
not the same are currently being exercised) that (a) pertain to the sale of
production at a fixed price and (b) have a maturity or expiry date of longer
than six (6) months from the date hereof.

TERM LOAN AND SECURITY AGREEMENT

32

7.10 LEASES. The oil and gas leases associated with the Oil and Gas
Properties are in full force and effect in accordance with their respective
terms, and there exist no material defaults in the performance of any obligation
thereunder. Additionally, Borrower is not aware of any event that with notice or
lapse of time, or both, would constitute a default under any such oil and gas
leases.

7.11 NON-CONSENT OPERATIONS. There have been no operations associated with
the Oil and Gas Properties under an operating agreement, unit agreement or
governmental order with respect to which Borrower has become a non-consenting
party.

7.12 CONDITION OF EQUIPMENT. All of the wells, facilities and equipment
associated with the Oil and Gas Properties are: (a) structurally sound with no
material defects known to Borrower, (b) in good operating condition, and (c)
have been and are maintained in accordance with prudent business standards.

7.13 WELLS. Each oil or gas well located on the Oil and Gas Properties is:
(a) properly permitted, (b) in compliance with all applicable Laws, and (c)
within the production tolerances allocated by the governmental entity or tribal
authority having appropriate jurisdiction. All of the leaseholds in which there
are located Hydrocarbon Interests of Borrower having a PV-10 Value of $100,000
are producing Hydrocarbons in commercial quantities. Each of Borrower's
producing wells listed on SCHEDULE 7.6(a)(ii) is located on an Oil and Gas
Property described in the legal description contained in an Oil and Gas Property
Mortgage which has been duly executed and delivered to Administrative Agent.

7.14 SWAP AGREEMENTS. As of the date hereof, and after the date hereof,
each report required to be delivered by the Borrower to Administrative Agent or
Lenders, sets forth, a true and complete list of all Swap Agreements of the
Borrower and each Subsidiary, the material terms thereof (including the type,
term, effective date, termination date and notional amounts or volumes), the net
mark to market value thereof, all credit support agreements relating thereto
(including any margin required or supplied) and the counterparty to each such
agreement.

7.15 HEDGING AGREEMENT. As of the Closing Date, there are no Hedging
Agreements (including commodity price swap agreements, forward agreements or
contracts of sale which provide for prepayment for deferred shipment or delivery
of oil, gas or other commodities) of the Borrower and each of its Subsidiaries.

7.16 COMPLIANCE WITH THE LAW. Neither Borrower nor any of its Subsidiaries
has violated any requirement of a Governmental Authority or failed to obtain any
license, permit, franchise or other governmental authorization necessary for the
ownership of the Property or the conduct of its business, which violation or
failure could reasonably be expected to result in (in the event such violation
or failure were asserted by any Person through appropriate action) a Material
Adverse Effect. Except for such acts or failures to act as do not result in and
could not reasonably be expected to result in a Material Adverse Effect, the Oil
and Gas Properties have been maintained, operated and developed in a good and
workmanlike manner and in conformity with all applicable laws and all rules,
regulations and orders of al duly constituted authorities having jurisdiction
and in conformity with the provisions of all leases, subleases or other
contracts comprising a part of the Hydrocarbon Interests and other contracts and
agreements forming a part of the Oil and Gas Properties; specifically in this
connection, (i) after the Closing Date, no Oil and Gas Properties are subject to
having allowable production reduced below the full and regular allowable
(including the maximum permissible tolerance) because of any overproduction
(whether or not the same was permissible at the time) prior to the Closing Date
and (ii) none of the wells comprising a part of the Oil and Gas Properties are
deviated from the vertical more than the maximum permitted by applicable laws,
regulations, rules and orders, and such wells are, in fact bottomed under and

TERM LOAN AND SECURITY AGREEMENT

33

are producing from the Oil and Gas Properties. Neither Borrower nor any of its
Subsidiaries has entered into, and the Oil and Gas Properties are not subject
to, any agreements, consent orders, administrative orders or similar obligations
based on a violation or alleged violation of Legal Requirements.

7.17 LITIGATION; ADVERSE FACTS. There is no action, suit, proceeding,
arbitration, or governmental investigation (whether or not purportedly on behalf
of Borrower or any of its Subsidiaries) at law or in equity or before or by any
Governmental Authority, domestic or foreign, pending or, to the knowledge of
Borrower, threatened against or affecting Borrower or any of its Subsidiaries or
any property of Borrower or any of its Subsidiaries that, either individually or
in the aggregate together with all other such actions, proceedings, and
investigations, has had, or could reasonably be expected to result in, a
Material Adverse Effect. Neither Borrower nor any of its Subsidiaries is subject
to or in default with respect to any final judgment, writ, injunction, decree,
rule, or regulation of any Governmental Authority, domestic or foreign, that has
had, or could reasonably be expected to result in, a Material Adverse Effect.

7.18 PAYMENT OF TAXES. All material tax returns and reports of Borrower
and its Subsidiaries required to be filed by any of them have been timely filed,
and all material taxes, assessments, fees, and other governmental charges upon
Borrower and its Subsidiaries and upon their respective properties, assets,
income, businesses, and franchises which are due and payable have been paid when
due and payable, except for Delaware corporate franchise and like fees, taxes
and assessments. Borrower does not know of any proposed tax assessment against
Borrower or any of its Subsidiaries other than those which are being actively
contested by Borrower or such Subsidiary in good faith and by appropriate
proceedings and for which reserves or other appropriate provisions, if any, as
may be required in conformity with GAAP shall have been made or provided
therefor.

7.19 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS.

(a) All of the contracts associated with the Oil and Gas Properties
of Borrower are in full force and effect in accordance with their
respective terms, and there exist no defaults in the performance of any
obligation thereunder. Additionally, Borrower is not aware of any event
that with notice or lapse of time, or both, would constitute a default
under any such contracts.

(b) Neither Borrower nor any of its Subsidiaries is in default in
the performance, observance, or fulfillment of any of the obligations,
covenants, or conditions contained in any of its Contractual Obligations,
and no condition exists that, with the giving of notice or the lapse of
time or both, would constitute such a default, except where the
consequences, direct or indirect, of such default or defaults, if any,
would not have a Material Adverse Effect.

(c) Neither Borrower nor any of its Subsidiaries is a party to or is
otherwise subject to any agreement or instrument or any charter or other
internal restriction which has had, or could reasonably be expected (based
upon assumptions that are reasonable at the time made) to result in,
individually or in the aggregate, a Material Adverse Effect.

7.20 GOVERNMENTAL REGULATION. Neither Borrower nor any of its Subsidiaries
is subject to regulation under the Public Utility Holding Company Act of 1935,
the Federal Power Act, the Interstate Commerce Act, or the Investment Company
Act of 1940 or under any other federal or state statute or regulation which may
limit its ability to incur Indebtedness or which may otherwise render all or any
portion of the Obligation unenforceable.

7.21 SECURITIES ACTIVITIES. Neither Borrower nor any of its Subsidiaries
is engaged principally, or as one of its important activities, in the business
of extending credit for the purpose of purchasing or carrying any Margin Stock.

TERM LOAN AND SECURITY AGREEMENT

34

7.22 EMPLOYEE PLANS.

(a) Borrower and each of its ERISA Affiliates are in substantial
compliance with all applicable provisions and requirements of ERISA with
respect to each Employee Plan, and have substantially performed all their
obligations under each Employee Plan, except to the extent that any
non-compliance with ERISA or any such failure to perform would not result
in material liability of Borrower or any of its ERISA Affiliates.

(b) No ERISA Event has occurred which has resulted or is reasonably
likely to result in any material liability to the PBGC or to any other
Person.

(c) Except to the extent required under Section 4980B of the Code
and/or Section 601 of ERISA, neither Borrower nor any of its Subsidiaries
maintains or contributes to any employee welfare benefit plan (as defined
in Section 3(1) of ERISA) that provides health or welfare benefits
(through the purchase of insurance or otherwise) for any retired or former
employees of Borrower or any of its Subsidiaries, except to the extent
that the provision of such benefits would not have a Material Adverse
Effect.

(d) No Employee Plan has an Unfunded Current Liability in an amount
that would have a Material Adverse Effect.

7.23 ENVIRONMENTAL PROTECTION. Except where no Material Adverse Effect
could reasonably be expected to result therefrom:

(a) the operations of Borrower and each of its Subsidiaries
(including, without limitation, all operations and conditions at or in the
Facilities) comply in all material respects with all Environmental Laws;

(b) Borrower and each of its Subsidiaries have obtained, and have
timely filed responses for, all material Authorizations under
Environmental Laws necessary to their respective operations, and all such
Authorizations are in good standing, and Borrower and each of its
Subsidiaries are in compliance with all material terms and conditions of
such Authorizations;

(c) neither Borrower nor any of its Subsidiaries has received (i)
any notice or claim to the effect that it is or may be liable to any
Person as a result of or in connection with any Hazardous Materials or
(ii) any letter or request for information under Section 104 of the
Comprehensive Environmental Response, Compensation, and Liability Act (42
U.S.C. Section 9604), Section 3007 of the Resource Conservation and
Recovery Act (42 U.S.C. Section 6927), or comparable state laws, and, to
the best knowledge of Borrower, none of the operations of Borrower or any
of its Subsidiaries is the subject of any federal or state investigation
relating to or in connection with any Hazardous Materials at any Facility
or at any other location;

(d) none of the operations of Borrower or any of its Subsidiaries is
subject to any judicial or administrative proceeding alleging the
violation of or liability under any Environmental Laws which could
reasonably be expected to have a Material Adverse Effect;

(e) to the knowledge of Borrower, neither Borrower nor any of its
Subsidiaries nor any of their respective Facilities or operations are
subject to any outstanding written order or agreement with any
Governmental Authority or private party relating to (i) any Environmental
Laws or (ii) any Environmental Claims;

TERM LOAN AND SECURITY AGREEMENT

35

(f) neither Borrower nor any of its Subsidiaries has any material
contingent liability in connection with any Release of any Hazardous
Materials by Borrower or any of its Subsidiaries;

(g) neither Borrower nor any of its Subsidiaries nor, to the
knowledge of Borrower, any predecessor of Borrower or any of its
Subsidiaries, has filed any notice under any Environmental Law indicating
past or present treatment or Release of Hazardous Materials at any
Facility, and none of Borrower's or any of its Subsidiaries' operations
involves the generation, transportation, treatment, storage, or disposal
of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state
equivalent;

(h) to the knowledge of Borrower, no Hazardous Materials exist on or
under any Facility in a manner that has a reasonable possibility of giving
rise to an Environmental Claim having a Material Adverse Effect, and
neither Borrower nor any of its Subsidiaries has filed any notice or
report of a Release of any Hazardous Materials that has a reasonable
possibility of giving rise to an Environmental Claim having a Material
Adverse Effect;

(i) neither Borrower nor any of its Subsidiaries nor, to the best
knowledge of Borrower, any of their respective predecessors has disposed
of any Hazardous Materials in a manner that has a reasonable possibility
of giving rise to an Environmental Claim having a Material Adverse Effect;

(j) to the knowledge of Borrower no underground storage tanks or
surface impoundments are on or at any Facility; and

(k) to the knowledge of Borrower, no Lien in favor of any Person
relating to or in connection with any Environmental Claim has been filed
or has been attached to any Facility.

7.24 DISCLOSURE. The representations and warranties of Borrower and its
Subsidiaries contained in the Loan Documents and in any other document,
certificate, or written statement furnished to Lenders by or on behalf of
Borrower or any of its Subsidiaries for use in connection with the transactions
contemplated by this Agreement, when taken together, do not contain any untrue
statement of a material fact or omit to state a material fact (known to
Borrower, in the case of any document not furnished by it) necessary in order to
make the statements contained herein or therein not misleading in light of the
circumstances in which the same were made. Any projections and pro forma
financial information contained in such materials are based upon good faith
estimates and assumptions believed by Borrower to be reasonable at the time
made, it being recognized by Lenders that such projections as to future events
are not to be viewed as facts and that actual results during the period or
periods covered by any such projections may differ from the projected results.
There is no fact known (or which should upon the reasonable exercise of
diligence be known) to Borrower (other than matters of a general economic
nature) that has had, or could reasonably be expected to result in, a Material
Adverse Effect and that has not been disclosed herein or in such other
documents, certificates, and statements furnished to Lenders for use in
connection with the transactions contemplated hereby.

7.25 PURPOSE OF CREDIT FACILITY. Borrower will use all of the Term Loan
Principal Debt (other than proceeds used to pay reasonable fees and expenses
incurred by Borrower in connection with this Agreement) to restructure the
claims of Lenders in the Chapter 11 Case in accordance with the terms of the
Reorganization Plan. No part of the Term Loan Principal Debt will be used,
directly or indirectly, for a purpose which violates any Law, including, without
limitation, the provisions of Regulations T, U, or X (as enacted by the Board of
Governors of the Federal Reserve System, as amended).

TERM LOAN AND SECURITY AGREEMENT

36

SECTION 8. AFFIRMATIVE COVENANTS.

Borrower covenants and agrees that, until payment in full of all of the
Term Loan Principal Debt and other Obligation, unless Required Lenders shall
otherwise give prior written consent, Borrower shall perform, and shall cause
each of its Subsidiaries to perform, all covenants in this SECTION 8.

8.1 FINANCIAL STATEMENTS AND OTHER REPORTS. Borrower will maintain, and
cause each of its Subsidiaries to maintain, a system of accounting established
and administered in accordance with sound business practices to permit
preparation of financial statements in conformity with GAAP. Borrower will
deliver to Administrative Agent:

(a) Monthly Financials: as soon as available and in any event within
30 days after the calendar month-end, a company prepared balance sheet,
income statement, and statement of cash flow covering Borrower's
operations during such period.

(b) Year-End Financials: as soon as available and in any event
within 90 days after the end of each Fiscal Year, (i) the consolidated and
consolidating balance sheets of Borrower and its Subsidiaries as at the
end of such Fiscal Year and the related consolidated and consolidating
statements of income and consolidated statement of cash flows of Borrower
and its Subsidiaries for such Fiscal Year, setting forth in comparative
form the corresponding figures for the previous fiscal year, all in
reasonable detail and certified by the chief financial officer of Borrower
that they fairly present, in all material respects, the financial
condition of Borrower and its Subsidiaries as at the dates indicated and
the results of their operations and their cash flows for the periods
indicated, and (ii) in the case of such consolidated financial statements,
a report thereon of independent certified public accountants of recognized
national standing selected by Borrower and reasonably satisfactory to
Required Lenders, which report shall be unqualified as to going concern
and scope of audit, and shall state that such consolidated financial
statements fairly present, in all material respects, the consolidated
financial position of Borrower and its Subsidiaries as at the dates
indicated and the results of their operations and their cash flows for the
periods indicated in conformity with GAAP applied on a basis consistent
with prior years (except as otherwise disclosed in such financial
statements) and that the examination by such accountants in connection
with such consolidated financial statements has been made in accordance
with generally accepted auditing standards;

(c) Officer's Certificate: together with each delivery of financial
statements of Borrower and its Subsidiaries pursuant to SECTIONS 8.1(a)
and (b) above, an Officer's Certificate of Borrower stating that: (i) all
financial statements delivered or caused to be delivered to the Lenders
have been prepared in accordance with GAAP (except, in the case of
unaudited financials statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present the financial
condition of the Borrower, (ii) the representations and warranties of the
Borrower in the Loan Documents are true and correct in all material
respects on and as of the date of the certificate, as though made on and
as of such date (except to the extent that such representations and
warranties relate solely to an earlier date), the signer has reviewed the
terms of this Agreement and has made, or caused to be made under its
supervision, a review in reasonable detail of the transactions and
condition of Borrower and its Subsidiaries during the accounting period
covered by such financial statements and that such review has not
disclosed the existence during or at the end of such accounting period,
and that the signers do not have knowledge of the existence as at the date
of such Officer's Certificate, of any condition or event that constitutes
a Event of Default or Potential Default, or, if any such condition or
event existed or exists, specifying the nature and period of existence
thereof and what action Borrower has taken, is taking, and proposes to
take with respect thereto;

TERM LOAN AND SECURITY AGREEMENT

37

(d) Accountants' Certification: together with each delivery of
consolidated financial statements of Borrower and its Subsidiaries
pursuant to CLAUSE (b) above, a written statement by the independent
certified public accountants giving the report thereon (i) stating that
their audit examination has included a reading of the terms of this
Agreement and the other Loan Documents as they relate to accounting
matters, and (ii) stating whether, in connection with their audit
examination, any condition or event, insofar as such condition or event
relates to accounting matters, that constitutes a Event of Default or
Potential Default has come to their attention and, if such a condition or
event has come to their attention, specifying the nature and period of
existence thereof; provided that such accountants shall not be liable by
reason of any failure to obtain knowledge of any such Event of Default or
Potential Default that would not be disclosed in the course of their audit
examination. Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to communicate
with Administrative Agent and to release to Administrative Agent whatever
financial information concerning Borrower that Administrative Agent may
request. Borrower hereby irrevocably authorizes and directs all auditors,
accountants, or other third parties to deliver to Administrative Agent, at
Borrower's expense, copies of Borrower's financial statements, papers
related thereto, and other accounting records of any nature in their
possession, and to disclose to Administrative Agent any information they
may have regarding Borrower's business affairs and financial conditions;

(e) Accountants' Reports: promptly upon receipt thereof (unless
restricted by applicable professional standards), copies of all reports
submitted to Borrower by independent certified public accountants in
connection with each annual, interim, or special audit of the financial
statements of Borrower and its respective Subsidiaries made by such
accountants, including, without limitation, any comment letter submitted
by such accountants to management in connection with their annual audit;

(f) SEC Filings and Press Releases: promptly upon their becoming
available, copies of (i) all financial statements, reports, notices, and
proxy statements sent or made available generally by Borrower to its
security Lenders, (ii) all regular and periodic reports and all
registration statements (other than on Form S-8 or a similar form) and
prospectuses, if any, filed by Borrower or any of its Subsidiaries with
any securities exchange or with the Securities and Exchange Commission or
any Governmental Authority or private regulatory authority, and (iii) all
press releases and other statements made available generally by Borrower
or any of its Subsidiaries to the public concerning material developments
in the business of Borrower or any of its Subsidiaries;

(g) Events of Default, etc.: promptly upon any officer of Borrower
obtaining knowledge (i) of any condition or event that constitutes an
Event of Default or Potential Default, or becoming aware that any Lender
has given any notice (other than to Administrative Agent) or taken any
other action with respect to a claimed Event of Default or Potential
Default, (ii) that any Person has given any notice to Borrower or any of
its Subsidiaries or taken any other action with respect to a claimed
default or event or condition of the type referred to in SECTION 10.2,
(iii) of any condition or event that would be required to be disclosed in
a current report filed by Borrower with the Securities and Exchange
Commission on Form 8-K (Items 1, 2, 4, 5, and 6 of such Form as in effect
on the date hereof) if Borrower were required to file such reports under
the Exchange Act, or (iv) of the occurrence of any event or change that
has caused or evidences, either in any case or in the aggregate, a
Material Adverse Effect, an Officer's Certificate specifying the nature
and period of existence of such condition, event, or change, or specifying
the notice given or action taken by any such Person and the nature of such
claimed Event of Default, Potential Default, default, event, or condition,
and what action Borrower has taken, is taking and proposes to take with
respect thereto:

TERM LOAN AND SECURITY AGREEMENT

38

(h) Litigation or Other Proceedings: (i) promptly upon any officer
of Borrower obtaining knowledge of (x) the institution of, or
non-frivolous threat of, any action, suit, proceeding (whether
administrative, judicial, or otherwise), governmental investigation, or
arbitration against or affecting Borrower or any of its Subsidiaries or
any property of Borrower or any of its Subsidiaries (collectively,
"PROCEEDINGS") not previously disclosed in writing by Borrower to Lenders
or (y) any material development in any Proceeding that, in any case:

(A) if adversely determined, has a reasonable possibility of
giving rise to a Material Adverse Effect; or

(B) seeks to enjoin or otherwise prevent the consummation of,
or to recover any damages or obtain relief as a result of, the
transactions contemplated hereby;

written notice thereof together with such other information as may be
reasonably available to Borrower to enable Lenders and their counsel to
evaluate such matters; and (ii) within 45 days after the end of each
fiscal quarter of Borrower, a schedule of all Proceedings involving any
alleged liability of, or claims against or affecting, Borrower or any of
its Subsidiaries equal to or greater than $1,000,000 and promptly after
request by Administrative Agent such other information as may be
reasonably requested by Administrative Agent to enable Administrative
Agent and its counsel to evaluate any of such Proceedings;

(i) ERISA Events: promptly upon becoming aware of the occurrence of
any ERISA Event that would result in a material liability, a written
notice specifying the nature thereof, what action Borrower or any of its
ERISA Affiliates has taken, is taking or proposes to take with respect
thereto and, when known, any action taken or threatened by the Internal
Revenue Service, the Department of Labor, or the PBGC with respect
thereto;

(j) ERISA Notices: with reasonable promptness, copies of (i) all
written notices received by Borrower or any of its ERISA Affiliates from a
Multiemployer Plan sponsor concerning an ERISA Event; and (ii) such other
documents or governmental reports or filings relating to any Employee Plan
as Administrative Agent shall reasonably request;

(k) Insurance: as soon as practicable and in any event by the last
day of each Fiscal Year, a report in form and substance satisfactory to
Administrative Agent outlining all material insurance coverage maintained
as of the date of such report by Borrower and its Subsidiaries and all
material insurance coverage planned to be maintained by Borrower and its
Subsidiaries in the immediately succeeding Fiscal Year;

(l) Environmental Audits and Reports: as soon as practicable
following receipt thereof, copies of all environmental audits and reports,
whether prepared by personnel of Borrower or any of its Subsidiaries or by
independent consultants, with respect to significant environmental matters
at any Facility or which relate to an Environmental Claim which could
result in a Material Adverse Effect;

(m) Regulatory Notices: promptly upon receipt, (i) notification of
any non-renewal, cancellation, termination, revocation, suspension,
impairment, or material modification of, or of any hearing, proceeding, or
investigation regarding, any Authorization held by Borrower or any of its
Subsidiaries which is reasonably likely to have a Material Adverse Effect,
(ii) copies of all notices or other documents received related to any
allegation or investigation regarding non-compliance with any applicable
insurance or other regulation or any other item reasonably likely to
materially adversely affect the Borrower's Authorization, (iii) any
material notice relating to

TERM LOAN AND SECURITY AGREEMENT

39

the maintenance by Borrower or any of its Subsidiaries of their respective
qualification for, participation in, and payment under, private insurance
programs and federal, state, and local governmental programs providing for
the payment and reimbursement of services rendered, and (iv) any material
notice relating to the accreditation of Borrower or any of its
Subsidiaries;

(n) Other Information: with reasonable promptness, such other
information and data with respect to Borrower or any of its Subsidiaries
as from time to time may be reasonably requested by Administrative Agent;
and

(o) Lists of Purchasers. Concurrently with the delivery of any
Reserve Report to the Administrative Agent pursuant to SECTION 8.2, a list
of Persons purchasing Hydrocarbons from the Borrower or any Subsidiary
accounting for at least 80% of the revenues resulting from the sale of all
Hydrocarbons in the one-year period prior to the "as of" date of such
Reserve Report.

(p) Production Report and Lease Operating Statements. Within 90 days
after the end of each fiscal quarter, a report setting forth, for each
calendar month during the then current fiscal year to date, the volume of
production and sales attributable to production (and the prices at which
such sales were made and the revenues derived from such sales) for each
such calendar month from the Oil and Gas Properties, and setting forth the
related ad valorem, severance and production taxes and lease operating
expenses attributable thereto and incurred for each such calendar month.

8.2 COLLATERAL REPORTING. Provide Administrative Agent with the following
documents at the following times in form satisfactory to Administrative Agent
during the term of this Agreement on a separate Borrower-by-Borrower basis, as
well as on a consolidated basis:

(a) By the last day of the month following each calendar quarter
(i.e., the last day of April, July, October and January), a report: (i)
listing the total amount actually paid by Borrower during the preceding
quarter for: (A) plugging and abandonment costs for previous or ongoing
plugging and abandonment operations pertaining to the Oil and Gas
Properties, and (B) general bond and supplemental bond payments pertaining
to plugging and abandonment costs; and (ii) estimating the future payments
for (A) and (B), above, for each of the succeeding two quarters;

(b) Reserve Reports prepared by an independent petroleum engineering
consultant pertaining to the six-month period ending December 31st and
June 30th of each year (with such Reserve Report shall be in form and
substance satisfactory to Administrative Agent), and shall: (i) be
accompanied by a certification of Borrower to the effect that nothing has
occurred since the date of the last Reserve Report that could reasonably
be expected to result in a Material Adverse Effect, except that which has
previously been disclosed to Administrative Agent in writing: and (ii)
contain such other information as may be reasonably requested by
Administrative Agent.

Each delivery of a Reserve Report by Borrower to Administrative Agent
shall constitute a representation and warranty by Borrower to
Administrative Agent that, unless otherwise disclosed to Administrative
Agent in writing on or prior to the date of such delivery, (w) Borrower
(or its Subsidiary, as the case may be) owns the Oil and Gas Properties
described in the Reserve Report free and clear of any Liens (except
Permitted Liens) and (x) each of the Oil and Gas Properties described in
such Reserve Report constitute at least ninety-five (95%) of the value of
Borrower's Proved Reserves in the Oil and Gas Property Collateral; and

TERM LOAN AND SECURITY AGREEMENT

40

(c) Upon request by Administrative Agent from time to time, copies of
Borrower's lease files, well files and contract files (including production
reports on each well, marketing contracts, and information regarding locations
of and equipment located on each well).

8.3 CORPORATE EXISTENCE.

Borrower will, and will cause each of its Subsidiaries to, at all times
preserve and keep in full force and effect its corporate existence and all
rights and franchises material to the business of Borrower and its Subsidiaries
(on a consolidated basis).

8.4 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION.

(a) Borrower will, and will cause each of its Subsidiaries to, pay
all taxes, assessments, and other governmental charges imposed upon it or
any of its properties or assets or in respect of any of its income,
businesses, or franchises before any penalty accrues thereon, and all
claims (including, without limitation, claims for labor, services,
materials, and supplies) for sums that have become due and payable and
that by law have or may become a Lien upon any of its properties or
assets, prior to the time when any penalty or fine shall be incurred with
respect thereto; provided that no such charge or claim need be paid if
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if such reserve or other
appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made therefor.

(b) Borrower will not, nor will it permit any of its Subsidiaries
to, file or consent to the filing of any consolidated income tax return
with any Person (other than Subsidiaries of Borrower).

8.5 OPERATION AND MAINTENANCE OF PROPERTIES; INSURANCE.

Borrower will maintain or cause to be maintained, the insurance policies
described on SCHEDULE 8.5 in full force and effect. Additionally, Borrower
shall:

(a) At its expense, do or cause to be done all things reasonably
necessary to preserve and keep in good repair, working order and
efficiency (except for normal wear and tear) all of its Oil and Gas
Properties and other material Properties including, without limitation,
all equipment, machinery and facilities, and from time to time will make
all the reasonably necessary repairs, renewals and replacements so that at
all times the state and condition of its Oil and Gas Properties and other
material Property will be fully preserved and maintained, allowing for
depletion in the ordinary course of business, except to the extent a
portion of such Oil and Gas Properties is no longer capable of producing
Hydrocarbons in commercial quantities (in which case Borrower shall fully
comply with all of its obligations and Legal Requirements pertaining to
plugging and abandoning its wells related to such portion). Borrower
shall, and shall cause each of its Subsidiaries to, promptly: (i) pay and
discharge, or make reasonable and customary efforts to cause to be paid
and discharged, all delay rentals, royalties, expenses and indebtedness
accruing under the leases or other agreements affecting or pertaining to
its Oil and Gas Properties; (ii) perform or make reasonable and customary
efforts to cause to be performed, in accordance with industry standards
the obligations required by each and all of the assignments, deeds,
leases, sub-leases, contracts and agreements affecting its interests in
its Oil and Gas Properties and other material Property and prevent any
forfeiture thereof or a default thereunder, except (A) to the extent a
portion of such Oil and Gas Properties is no longer capable of producing
Hydrocarbons in economically reasonable amounts. Borrower shall, and shall
cause each of its Subsidiaries, to

TERM LOAN AND SECURITY AGREEMENT

41

operate its Oil and Gas Properties and other material Property or cause or
make reasonable and customary efforts to cause such Oil and Gas Property
Collateral and other material Property to be operated in a reasonably
prudent manner in accordance with the practices of the industry and in
compliance in all material respects with all applicable contracts and
agreements and in compliance in all material respects with all Legal
Requirements.

(b) At its expense, maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto, so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those
items of Equipment that constitute fixtures on the Closing Date, Borrower
shall not permit any item of Equipment to become a fixture to real estate
or an accession to other property, and such Equipment shall at all times
remain personal property.

(c) At its expense, (i) explore, develop and maintain the leases,
wells, units and acreage to which the Oil and Gas Properties pertains in a
prudent and economical manner, (ii) act prudently and in accordance with
customary industry standards in managing or operating the Oil and Gas
Properties, (iii) pay and promptly discharge all rentals, delay rentals,
royalties, overriding royalties, payments of production and other
indebtedness or obligations accruing under the leases comprising the Oil
and Gas Properties, and perform every act required to keep such leases in
full force and effect, (iv) deliver all operating agreements, pooling or
unitization agreements, sales or processing contracts, drilling and/or
development agreements, pipeline transportation agreements and other
material agreements which pertain to the Oil and Gas Properties, (v)
deliver production information on a monthly basis, (vi) deliver copies of
all reports, forms and other documents and data submitted by Borrower or
any of its Subsidiaries to the Federal Energy Regulatory Commission, the
applicable state conservation agencies and any other applicable
Governmental Authorities, (vii) not mortgage, pledge or otherwise encumber
or sell the Oil and Gas Properties, (viii) not alter any Material Contract
relating to the Oil and Gas Properties except to the limited extent
permitted under this Agreement, (ix) pay on or before the due date thereof
all of Borrower's and each of its Subsidiaries' lease operating expenses
and other liabilities with respect to which a mineral lien,
subcontractor's lien, mechanic's lien, materialmen's lien or other Lien
against any of the Collateral may arise which may have a priority superior
to Administrative Agent's Lien on such Collateral, and (x) perform all
acts and execute such documents as Administrative Agent may require in
order to maintain the existence, perfection and first priority of
Administrative Agent's Lien on the Oil and Gas Properties and the other
Collateral.

8.6 INSPECTION; LENDER MEETING. Borrower shall, and shall cause each of
its Subsidiaries to, permit any authorized representatives designated by any
Lender to visit and inspect any of the properties of Borrower or any of its
Subsidiaries, including its and their financial and accounting records, and to
make copies and take extracts therefrom, and to discuss its and their affairs,
finances, and accounts with its and their officers and independent public
accountants, all upon reasonable advance notice and at such reasonable times
during normal business hours and as often as may be reasonably requested.
Without in any way limiting the foregoing, Borrower will, upon the request of
Administrative Agent, participate in a meeting of Administrative Agent and
Lenders once during each Fiscal Year to be held at Borrower's corporate offices
(or such other location as may be agreed to by Borrower and Administrative
Agent) at such time as may be agreed to by Borrower and Administrative Agent.

8.7 COMPLIANCE WITH LAWS, ETC.

(a) Borrower shall, and shall cause each of its Subsidiaries to,
comply with the requirements of all applicable Laws, rules, regulations,
and orders of any Governmental

TERM LOAN AND SECURITY AGREEMENT

42

Authority, including all Environmental Laws, noncompliance with which
could reasonably be expected to cause a Material Adverse Effect.

(b) Establish and implement such procedures as may be reasonably
necessary to continuously determine and assure that: (i) all Property and
the operations conducted thereon are in compliance with and do not violate
the requirements of any Environmental Laws, (ii) no oil, Hazardous
Materials or solid wastes are disposed of or otherwise Released except in
compliance with Environmental Laws, (iii) no Hazardous Materials will be
released on or to any such Property in a quantity equal to or exceeding
that quantity which requires reporting under CERCLA, and (iv) no oil, oil
and gas exploration and production wastes, or Hazardous Materials is
released on or to any such Property so as to pose an imminent and
substantial endangerment to public health or welfare or the environment.

(c) Borrower agrees that Administrative Agent may, from time to time
and in its reasonable discretion, retain, at Borrower's expense, an
independent professional consultant to review any report relating to
Hazardous Materials prepared by or for Borrower and to conduct its own
investigation, no more frequently than bi-annually, of any facility
currently owned, leased, operated, or used by Borrower or any of its
Subsidiaries, and Borrower agrees to use all reasonable efforts to obtain
permission for Administrative Agent's professional consultant to conduct
its own investigation of any such Facility previously owned, leased,
operated, or used by Borrower or any of its Subsidiaries. Borrower shall
use its reasonable efforts to obtain for Administrative Agent and its
agents, employees, consultants, and contractors the right, upon reasonable
notice to Borrower, to enter into or on to the facilities currently owned,
leased, operated, or used by Borrower or any of its Subsidiaries to
perform such tests on such property as are reasonably necessary to conduct
such a review and/or investigation. Borrower and Administrative Agent
hereby acknowledge and agree that any report of any investigation
conducted at the request of Administrative Agent pursuant to this SECTION
8.7(c) will be obtained and shall be used by Administrative Agent and
Lenders for the purposes of Lenders' internal credit decisions and to
protect Lenders' security interests, if any, created by the Loan
Documents. Administrative Agent agrees to deliver a copy of any such
report to Borrower with the understanding that Borrower acknowledges and
agrees that (i) it will indemnify, and hold harmless Administrative Agent
and each Lender from any costs, losses, or liabilities relating to
Borrower's use of or reliance on such report, (ii) neither Administrative
Agent nor any Lender makes any representation or warranty with respect to
such report, and (iii) by delivering such report to Borrower, neither
Administrative Agent nor any Lender is requiring or recommending the
implementation of any suggestions or recommendations contained in such
report.

(d) Borrower shall promptly advise Administrative Agent in writing
and in reasonable detail of (i) any Release of any Hazardous Materials
required to be reported to any federal, state, local, or foreign
Governmental Authority under any applicable Environmental Laws, (ii) any
and all written communications with respect to any Environmental Claims
that have a reasonable possibility of giving rise to a Material Adverse
Effect or with respect to any Release of Hazardous Materials required to
be reported to any federal, state, or local Governmental Authority, (iii)
any remedial action taken by Borrower or any other Person in response to
(y) any Hazardous Materials on, under, or about any Facility, the
existence of which has a reasonable possibility of resulting in an
Environmental Claim having a Material Adverse Effect, or (z) any
Environmental Claim that could have a Material Adverse Effect, (iv)
Borrower's discovery of any occurrence or condition on any real property
adjoining or in the vicinity of any Facility that could cause such
Facility or any part thereof to be subject to any restrictions on the
ownership, occupancy, transferability, or use thereof under any
Environmental Laws, and (v) any request for information from any
Governmental Authority that suggests such

TERM LOAN AND SECURITY AGREEMENT

43

Governmental Authority is investigating whether Borrower or any of its
Subsidiaries may be potentially responsible for a Release of Hazardous
Materials.

(e) Borrower shall, at its own expense, provide copies of such
documents or information as Administrative Agent may reasonably request in
relation to any matters disclosed pursuant to this SECTION 8.7.

8.8 BORROWER'S REMEDIAL ACTION REGARDING HAZARDOUS MATERIALS. Borrower
shall promptly take, and shall cause each of its Subsidiaries promptly to take,
any and all necessary remedial action in connection with the presence, storage,
use, disposal, transportation, or Release of any Hazardous Materials on or under
any Facility in order to reasonably prevent or mitigate damage to the property
or to persons of third parties and to comply with all applicable Environmental
Laws and Authorizations unless the failure to so comply could not reasonably be
expected to have a Material Adverse Effect. In the event Borrower or any of its
Subsidiaries undertakes any remedial action with respect to any Hazardous
Materials on or under any Facility, Borrower or such Subsidiary shall conduct
and complete such remedial action in material compliance with all applicable
Environmental Laws, and in accordance with the policies, orders, and directives
of all federal, state, and local Governmental Authorities except when, and only
to the extent that, Borrower's or such Subsidiary's liability for such presence,
storage, use, disposal, transportation, or discharge of any Hazardous Materials
is being contested in good faith by Borrower or such Subsidiary.

8.9 OIL AND GAS PROPERTY TITLE INFORMATION.(a) On or before the delivery
to Administrative Agent of each Reserve Report required by SECTION 8.2
Borrower will provide Administrative Agent with current title opinions
covering the Oil and Gas Property for which title opinions have not
previously been provided to Administrative Agent so that at all times the
value of the Proved Reserves for which title opinions are or have been
provided to Administrative Agent shall equal or exceed ninety-five percent
(95%) of the NYMEX Value of all of the Oil and Gas Property as set forth
in the most recently delivered Reserve Report of Proved Reserves.

(b) Borrower shall cure all title defects or exceptions which are
not Permitted Liens, or substitute acceptable Oil and Gas Property with no
title defects or exceptions except for Permitted Liens covering Oil and
Gas Property of an equivalent value, within 30 days after a request by
Administrative Agent to cure such defects or exceptions. Upon the
discovery of any title defect or exception which is not a Permitted Lien,
Administrative Agent shall have the right to exercise the right to remedy
such title defect or exception in its sole discretion from time to time
(and any failure to so exercise this remedy at any time shall not be a
waiver as to future exercise of the remedy by Administrative Agent).

8.10 ADDITIONAL COLLATERAL.

(a) Should Borrower or any of its Subsidiaries purchase, otherwise
acquire or own any Oil and Gas Property that is not already included in
the Oil and Gas Properties and the subject of an Oil and Gas Properties
Mortgage in favor of Administrative Agent other than Oil and Gas
Properties owned on the date of this Agreement, which have a NYMEX Value
of $100,000 or less (until such time as the NYMEX Value thereof exceeds
$100,000) for the benefit of the Lenders, Borrower will grant or cause to
be granted to Administrative Agent as security for the Obligations a
first-priority Lien (subject only to Permitted Liens) on all of Borrower's
or such Subsidiary's, as the case may be, interest in such Oil and Gas
Properties not already subject to a Lien of such an Mortgage
simultaneously with Borrower's or such Subsidiary's purchase, acquisition
or ownership of such Oil and Gas Properties which Lien will be created and
perfected by and in accordance with the provisions of an Mortgage and
other security agreements and

TERM LOAN AND SECURITY AGREEMENT

44

financing statements, or other security instruments, all in form and
substance satisfactory to Administrative Agent in its sole discretion and
in sufficient executed (and acknowledged where necessary or appropriate)
counterparts for recording purposes.

(b) Concurrently with the granting of the Lien or other action
referred to in SECTION 8.10(a) above, Borrower will provide to
Administrative Agent title information and a title opinion in form and
substance satisfactory to Administrative Agent in its sole discretion with
respect to Borrower's or such Subsidiary's, as the case may be, interest
in such Oil and Gas Properties.

8.11 PAYMENT OF OBLIGATION; LEASES.

(a) The Loan Parties shall pay the Obligation in accordance with the
terms and provisions of the Loan Documents.

(b) The Borrower shall pay when due all rents and other amounts
payable under any leases to which Borrower is a party or by which
Borrower's properties and assets are bound.

8.12 FURTHER ASSURANCES. At any time or from time to time upon the request
of Administrative Agent, Borrower will, at its expense, promptly execute,
acknowledge, and deliver such further documents and do such other acts and
things as Administrative Agent may reasonably request in order to effect fully
the purposes of the Loan Documents and to provide for payment of the Obligation
in accordance with the terms of this Agreement and the other Loan Documents. In
furtherance and not in limitation of the foregoing, Borrower shall take, and
cause each of its Subsidiaries to take, such actions as Administrative Agent may
reasonably request from time to time (including, without limitation, the
execution and delivery of guaranties, security agreements, pledge agreements,
mortgages, deeds of trust, landlord's consents and estoppels, stock powers,
financing statements, and other documents, the filing or recording of any of the
foregoing, title insurance with respect to any of the foregoing that relates to
an interest in real property, and the delivery of stock certificates and other
collateral with respect to which perfection is obtained by possession) to ensure
that the Obligation is guarantied by the Guarantors and is secured by the
Collateral.

8.13 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment
only at the locations identified on SCHEDULE 7.2; provided, however, that
Borrower may amend SCHEDULE 7.2 so long as such amendment occurs by written
notice to Administrative Agent not less than 30 days prior to the date on which
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Administrative Agent's Liens
on such assets and also provides to Administrative Agent a satisfactory landlord
waiver to the extent Administrative Agent does not have a Collateral Access
Agreement.

8.14 USE OF PROCEEDS. Borrower shall use all of the Term Loan Principal
Debt (other than proceeds used to pay reasonable fees and expenses incurred by
Borrower in connection with this Agreement) to restructure the claims of Lenders
in the Chapter 11 Case in accordance with the terms of the Reorganization Plan.
No part of the Term Loan Principal Debt will be used, directly or indirectly,
for a purpose which violates any Law, including, without limitation, the
provisions of Regulations T, U, or X (as enacted by the Board of Governors of
the Federal Reserve System, as amended).

8.15 REORGANIZATION PLAN. Comply with the provisions of the Reorganization
Plan.

SECTION 9. NEGATIVE COVENANTS.

TERM LOAN AND SECURITY AGREEMENT

45

Borrower covenants and agrees that, until payment in full of all of the
Term Loan Principal Debt and other Obligation, unless Required Lenders shall
otherwise give prior written consent, Borrower shall perform, and shall cause
each of its Subsidiaries to perform, all covenants in this SECTION 9.

9.1 INDEBTEDNESS. Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume, or guaranty, or
otherwise become or remain directly or indirectly liable with respect to, any
Indebtedness, except:

(a) Each of the Loan Parties may become and remain liable with
respect to the Obligation;

(b) Borrower and its Subsidiaries, as applicable, may remain liable
with respect to Indebtedness described in SCHEDULE 9.1; and

(c) Indebtedness of Borrower and its Subsidiaries; provided that
such Indebtedness may consist only of Capital Leases capitalized on the
consolidated balance sheet of Borrower and its Subsidiaries and other
Indebtedness secured by Liens permitted under SECTION 9.2(a)(iii);
provided further that, the aggregate amount of all Indebtedness
outstanding under this CLAUSE (c) at any time shall not exceed $500,000.

9.2 PROHIBITION ON LIENS. Borrower shall not, and shall not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume, or permit to
exist any Lien on or with respect to any property or asset of any kind
(including any document or instrument in respect of goods or accounts
receivable) of Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired, or any income or profits therefrom, or file or permit the
filing of, or permit to remain in effect, any financing statement, or other
similar notice of any Lien with respect to any such property, asset, income, or
profits under the Uniform Commercial Code of any state or under any similar
recording or notice statute, except:

(a) Permitted Liens;

(b) Liens described in SCHEDULE 9.2;

(c) Purchase money security interests (including mortgages,
conditional sales, Capital Leases, and any other title retention or
deferred purchase devices) in real or tangible personal property of
Borrower or any of its Subsidiaries existing or created at the time of
acquisition thereof or within 30 days thereafter, and the renewal,
extension, and refunding of any such security interest in an amount not
exceeding the amount thereof remaining unpaid immediately prior to such
renewal, extension, or refunding; provided, however, that such
Indebtedness is permitted by Section 9.1(c); and

(d) Liens in favor of Administrative Agent granted pursuant to the
Collateral Documents; and

(e) Non-consensual Liens existing on the Closing Date in favor of
contractors, subcontractors, co-working owners (whether acting as
operating or non-operating), arising solely from the conduct of oil and
gas operations associated with the Collateral.

9.3 INVESTMENTS. Borrower shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, make or own any Investment in any
Person except Borrower and its Subsidiaries may make and own Investments in Cash
Equivalents.

TERM LOAN AND SECURITY AGREEMENT

46

9.4 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT
WITH BAILEES. Relocate its chief executive office to a new location without
Borrower providing 30 days prior written notification thereof to Administrative
Agent and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected Administrative Agent's Liens and also provides to
Administrative Agent a satisfactory Collateral Access Agreement with respect to
such new location. The Inventory and Equipment shall not at any time now or
hereafter be stored with a bailee, warehouseman, or similar party without
Administrative Agent's prior written consent.

9.5 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES. Borrower shall not,
and shall not permit any of its Subsidiaries to:

(a) change any Borrower's, or any of its Subsidiaries' name,
corporate structure (within the meaning of the UCC), identity, or add any
new trade, dba, or fictitious name;

(b) alter the corporate, capital, or legal structure of Borrower or
any of its Subsidiaries, create any new Subsidiaries or enter into any
transaction of merger or consolidation, or liquidate, wind-up, or dissolve
itself (or suffer any liquidation or dissolution);

(c) sell, lease, assign, farm-out, convey, transfer, or otherwise
dispose of any of any Borrower's or any of its Subsidiaries' Properties or
assets other than (i) sales of Inventory to buyers in the ordinary course
of such Borrower's business as currently conducted, (ii) farmouts of
nonproven acreage or nonproven depths and assignments in connection with
such farmouts, and (iii) the sale or transfer of Equipment that is no
longer necessary for the business of Borrower or such Subsidiary and is
replaced by Equipment of at least comparable value and use; or

(d) cause, permit, or suffer, directly or indirectly, any Change in
Control.

9.6 SALES AND LEASE-BACKS. Borrower shall not, and shall not permit any of
its Subsidiaries to, directly or indirectly, become or remain liable as lessee
or as a guarantor or other surety with respect to any lease, whether an
operating lease or a Capital Lease, of any property (whether real, personal, or
mixed), whether now owned or hereafter acquired, (i) which Borrower or any of
its Subsidiaries has sold or transferred or is to sell or transfer to any other
Person (other than Borrower or any of its Subsidiaries) or (ii) which Borrower
or any of its Subsidiaries intends to use for substantially the same purpose as
any other property which has been or is to be sold or transferred by Borrower or
any of its Subsidiaries to any Person (other than Borrower or any of its
Subsidiaries) in connection with such lease.

9.7 SALE OR DISCOUNT OF RECEIVABLES. Borrower shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly, sell with recourse,
or discount or otherwise sell for less than the face value thereof, any of its
notes or accounts receivable other than private self-pay receivables and
receivables over 180 days old.

9.8 TRANSACTIONS WITH AFFILIATES. Borrower shall not, and shall not permit
any of its Subsidiaries to, directly or indirectly, enter into or permit to
exist any transaction (including, without limitation, the purchase, sale, lease,
or exchange of any property or the rendering of any service) with any Affiliate
of Borrower, on terms that are less favorable to Borrower or that Subsidiary, as
the case may be, than those that might be obtained at the time from Persons who
are not an Affiliate; provided that the foregoing restriction shall not apply to
(i) any transaction between Borrower and any of its Subsidiaries or between any
of its Subsidiaries, and (ii) reasonable and customary fees paid to members of
the boards of directors of Borrower and its Subsidiaries.

TERM LOAN AND SECURITY AGREEMENT

47

9.9 DISTRIBUTIONS; REPURCHASES OF CAPITAL STOCK. Make any distribution or
declare or pay any dividends (in cash or other property, other than capital
Stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital
Stock, of any class, whether now or hereafter outstanding.

(a) directly or indirectly sell, assign, pledge, or otherwise
encumber or dispose of any shares of capital stock or, other equity
securities of any of its Subsidiaries, except as permitted under this
Agreement or the Collateral Documents or to qualify directors if required
by applicable law; or

(b) permit any of its Subsidiaries directly or indirectly to sell,
assign, pledge, or otherwise encumber or dispose of any shares of capital
stock or other equity securities of any of its Subsidiaries (including
such Subsidiary), except (a) as permitted under this Agreement or the
Collateral Documents or to Borrower, another wholly-owned Subsidiary of
Borrower or (b) to qualify directors if required by applicable law.

9.10 CONDUCT OF BUSINESS. Borrower shall not, and shall not permit any of
its Subsidiaries to, engage in any business other than (a) the businesses
engaged in by Borrower and its Subsidiaries on the Closing Date and (b) such
other lines of business as may be consented to by Administrative Agent and
Required Lenders.

9.11 AMENDMENTS OR WAIVERS OF AGREEMENTS. Without the prior written
consent of Required Lenders, neither Borrower nor any of its Subsidiaries shall
agree to any amendment, restatement, supplement, or other modification to, or
waive any of its rights under, any Related Agreement if such amendment,
restatement, supplement, modification, or waiver would be materially adverse to
the Lenders.

9.12 GAS IMBALANCES, TAKE-OR-PAY OR OTHER PREPAYMENTS. Borrower shall not,
and shall not permit any of its Subsidiaries to, enter into any contracts or
agreements which warrant production of Hydrocarbons and will not hereafter allow
gas imbalances, take-or-pay or other prepayments with respect to its Oil and Gas
Properties which would require such Person to deliver Hydrocarbons produced on
Oil and Gas Properties at some future time without then or thereafter receiving
full payment therefor to exceed, during any monthly period, five percent (5%) of
the current aggregate monthly gas production for such monthly period from the
Oil and Gas Properties.

9.13 SWAP AGREEMENTS. The Borrower will not, and will not permit any
Subsidiary to, enter into any Swap Agreements with any Person other than (a)
Swap Agreements in respect of commodities (i) with an Approved Counterparty and
(ii) the notional volumes for which (when aggregated with other commodity Swap
Agreements then in effect other than basis differential swaps on volumes already
hedged pursuant to other Swap Agreements) do not exceed, as of the date such
Swap Agreement is executed, 80% of the reasonably anticipated projected
production from proved, developed, producing Oil and Gas Properties for each
month during the period during which such Swap Agreement is in effect for each
of crude oil and natural gas, calculated separately, and (b) Swap Agreements in
respect of interest rates with an Approved Counterparty, as follows: (i) Swap
Agreements effectively converting interest rates from fixed to floating, the
notional amounts of which (when aggregated with all other Swap Agreements of the
Borrower and its Subsidiaries then in effect effectively converting interest
rates from fixed to floating) do not exceed 50% of the then outstanding
principal amount of the Borrower's Debt for borrowed money which bears interest
at a fixed rate and (ii) Swap Agreements effectively converting interest rates
from floating to fixed, the notional amounts of which (when aggregated with all
other Swap Agreements of the Borrower and its Subsidiaries then in effect
effectively converting interest rates from floating to fixed) do not exceed 75%
of the then outstanding principal amount of the Borrower's Debt for borrowed
money which bears interest at a floating rate. In no event shall any Swap
Agreement to which

TERM LOAN AND SECURITY AGREEMENT

48

the Borrower or any Subsidiary is a party contain any requirement,
agreement or covenant for the Borrower or any Subsidiary to post cash or
other collateral or margin to secure their obligations under such Swap
Agreement or to cover market exposures.

9.14 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:

(a) engage, or permit any Subsidiary of Borrower to engage, in any
prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the
Code for which a statutory or class exemption is not available or a
private exemption has not been previously obtained from the Department of
Labor.

(b) permit to exist with respect to any Employee Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and
412 of the Code), whether or not waived;

(c) fail, or permit any Subsidiary of Borrower to fail, to pay
timely required contributions or annual installments due with respect to
any waived funding deficiency to any Employee Plan;

(d) terminate, or permit any Subsidiary of Borrower to terminate,
any Employee Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;

(e) fail, or permit any Subsidiary of Borrower to fail, to make any
required contribution or payment to any Multiemployer Plan;

(f) fail, or permit any Subsidiary of Borrower to fail, to pay any
required installment or any other payment required under Section 412 of
the Code on or before the due date for such installment or other payment;

(g) amend, or permit any Subsidiary of Borrower to amend, a Plan
resulting in an increase in current liability for the plan year such that
either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is
required to provide security to such Plan under Section 401(a)(29) of the
Code; or

(h) withdraw, or permit any Subsidiary of Borrower to withdraw, from
any Multiemployer Plan where such withdrawal is reasonably likely to
result in any liability of any such entity under Title IV of ERISA;

which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $250,000.

9.15 MAINTENANCE OF PROPRIETARY RIGHTS.

Do any act, or omit to do any act, where good business judgment dictates
otherwise whereby the Proprietary Rights or any registration or
application appurtenant thereto, may become abandoned, invalidated,
unenforceable, avoided, avoidable, or will otherwise diminish in value.
Borrower shall notify Administrative Agent immediately if it knows of any
reason or has reason to know of any ground under which this result may
occur. Borrower shall take appropriate action at its expense, where good
business judgment calls for the same, to halt the infringement of the

TERM LOAN AND SECURITY AGREEMENT

49

Proprietary Rights and shall properly exercise its duty to control the
nature and quality of the goods offered by any licensees in connection
with the licenses set forth in SCHEDULE P.

SECTION 10. DEFAULT.

The term "EVENT OF DEFAULT" means the occurrence of any one or more of the
following events:

10.1 FAILURE TO MAKE PAYMENTS WHEN DUE. Failure or refusal to pay all or
any part of the Term Loan Principal Debt when due, whether at stated maturity,
by acceleration, by notice of prepayment, or otherwise; or failure or refusal to
pay any interest, fees, or any other part of the Obligation within five days
after the date due; or

10.2 DEFAULT IN OTHER AGREEMENTS. (a) Failure of Borrower or any of its
Subsidiaries to pay when due any principal of or interest on any Indebtedness
(other than Indebtedness referred to in SECTION 10.1); or (b) breach or default
by Borrower or any of its Subsidiaries with respect to any Indebtedness, or (c)
any loan agreement, mortgage, indenture or other agreement relating to such
Indebtedness; or

10.3 BREACH OF CERTAIN COVENANTS. Failure of any Loan Party to perform or
comply with any term or condition contained in this Agreement; or

10.4 BREACH OF WARRANTY. Any representation, warranty, certification, or
other statement made by Borrower or any of its Subsidiaries in any Loan Document
or in any statement or certificate at any time given by Borrower or any of its
Subsidiaries in writing pursuant hereto or thereto or in connection herewith or
therewith shall be false in any material respect on the date as of which made;
or

10.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS. Any Loan Party shall default in
the performance of or compliance with any term contained in this Agreement or
any of the other Loan Documents, other than any such term referred to in any
other Section of this SECTION 10, and such default shall not have been remedied
or waived within 30 days after the earlier of (a) an officer of Borrower
becoming aware of such default or (b) receipt by Borrower of notice from
Administrative Agent or any Lender of such default; or

10.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (a) A court
having jurisdiction in the premises shall enter a decree or order for relief in
respect of Borrower or any of its Subsidiaries in an involuntary case under the
Bankruptcy Code or under any other applicable Debtor Relief Law now or hereafter
in effect, which decree or order is not stayed; or any other similar relief
shall be granted under any applicable federal or state law; or (b) an
involuntary case shall be commenced against Borrower or any of its Subsidiaries
under the Bankruptcy Code or under any other Debtor Relief Law now or hereafter
in effect; or a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, sequestrator, trustee, custodian,
or other officer having similar powers over Borrower or any of its Subsidiaries,
or over all or a substantial part of its property, shall have been entered; or
there shall have occurred the involuntary appointment of an interim receiver,
trustee, or other custodian of Borrower or any of its Subsidiaries for all or a
substantial part of its property; or a warrant of attachment, execution, or
similar process shall have been issued against any substantial part of the
property of Borrower or any of its Subsidiaries, and any such event described in
this CLAUSE (b) shall continue for 60 days unless dismissed, bonded, or
discharged; or

10.7 VOLUNTARY BANKRUPTCY, APPOINTMENT OF RECEIVER, ETC. (a) Borrower or
any of its Subsidiaries shall have an order for relief entered with respect to
it or commence a voluntary case under

TERM LOAN AND SECURITY AGREEMENT

50

the Bankruptcy Code or under any other applicable Debtor Relief Law now or
hereafter in effect, or shall consent to the entry of an order for relief in an
involuntary case, or to the conversion of an involuntary case to a voluntary
case, under any Debtor Relief Law, or shall consent to the appointment of or
taking possession by a receiver, trustee, or other custodian for all or a
substantial part of its property; or Borrower or any of its Subsidiaries shall
make any assignment for the benefit of creditors; or (b) Borrower or any of its
Subsidiaries shall be unable, or shall fail generally, or shall admit in writing
its inability, to pay its debts as such debts become due; or the Board of
Directors of Borrower or any of its Subsidiaries (or any committee thereof)
shall adopt any resolution or otherwise authorize any action to approve any of
the actions referred to in CLAUSE (a) above or this CLAUSE (b); or

10.8 JUDGMENTS AND ATTACHMENTS. Any money judgment, writ, or warrant of
attachment or similar process shall be entered or filed against Borrower or any
of its Subsidiaries or any of their respective assets and shall remain
undischarged, unvacated, unbonded, or unstayed for a period of 60 days (or in
any event later than five days prior to the date of any proposed sale
thereunder); or

10.9 DISSOLUTION. Any order, judgment, or decree shall be entered against
Borrower or any of its Subsidiaries decreeing the dissolution or split up of
Borrower or that Subsidiary and such order shall remain undischarged or unstayed
for a period in excess of 30 days; or

10.10 EMPLOYEE PLANS. There shall occur one or more ERISA Events which
individually or in the aggregate results in a Material Adverse Effect; or there
shall exist an Unfunded Current Liability, individually or in the aggregate for
all Pension Plans (excluding for purposes of such computation any Employee Plans
with respect to which there is no Unfunded Current Liability), which would have
a Material Adverse Effect; or

10.11 CHANGE OF CONTROL. The occurrence of a Change of Control; or

10.12 FAILURE OF SECURITY. Upon execution and delivery thereof, any
Collateral Document shall, at any time, cease to be in full force and effect
(other than by reason of a release of Collateral thereunder in accordance with
the terms hereof or thereof, the satisfaction in full of the Obligation or any
other termination of such Collateral Document in accordance with the terms
hereof or thereof) or shall be declared null and void, or the validity or
enforceability thereof shall be contested in writing by any Loan Party, or
Administrative Agent shall not have or shall cease to have a valid security
interest in any Collateral purported to be covered thereby, perfected and with
the priority required by the relevant Collateral Document, for any reason other
than the failure of Administrative Agent or any Lender to take any action within
its control, subject only to Liens permitted under the applicable Collateral
Documents; or

10.13 CONFIRMATION ORDER. The entry of any order amending, supplementing,
staying, vacating, or otherwise modifying the Loan Documents or the Confirmation
Order without the written consent of Administrative Agent and Required Lenders;
or

10.14 LIEN CHALLENGE. The commencement of a suit or action against
Administrative Agent or any Lender, and, as to any suit or action brought by any
Person other than Borrower or an officer or employee of Borrower, the
continuation thereof without dismissal for 30 days after service thereof on
Administrative Agent or any Lender, that asserts, by or on behalf of Borrower,
any claim or legal or equitable remedy which seeks to subordinate, invalidate,
reduce or impair the claim or Lien of Administrative Agent or such Lender
hereunder or under any other Loan Document.

SECTION 11. RIGHTS AND REMEDIES.

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51

11.1 REMEDIES UPON EVENT OF DEFAULT.

(a) Debtor Relief. If an Event of Default exists under SECTION 10.6
or 10.7, the commitment to extend credit hereunder shall automatically
terminate and the entire unpaid balance of the Obligation shall
automatically become due and payable without any action or notice of any
kind whatsoever.

(b) Other Event of Defaults. If any Event of Default exists,
Administrative Agent may (and, subject to the terms of SECTION 12, shall
upon the request of Required Lenders) or Required Lenders may, do any one
or more of the following: (i) if the maturity of the Obligation has not
already been accelerated under SECTION 11.1(a), declare the entire unpaid
balance of the Obligation, or any part thereof, immediately due and
payable, whereupon it shall be due and payable; (ii) terminate the
commitments of Lenders to extend credit hereunder; (iii) reduce any claim
to judgment; (iv) to the extent permitted by Law, exercise (or request
each Lender to, and each Lender shall be entitled to, exercise) the Rights
of offset or banker's Lien against the interest of each Borrower in and to
every account and other property of any Borrower which are in the
possession of Administrative Agent or any Lender to the extent of the full
amount of the Obligation (to the extent permitted by Law, each Loan Party
being deemed directly obligated to each Lender in the full amount of the
Obligation for such purposes); and (v) exercise any and all other legal or
equitable Rights afforded by the Loan Documents, the Laws of the State of
New York, or any other applicable jurisdiction as Administrative Agent or
Required Lenders (as the case may be) shall deem appropriate, or
otherwise, including, but not limited to, the Right to bring suit or other
proceedings before any Governmental Authority either for specific
performance of any covenant or condition contained in any of the Loan
Documents or in aid of the exercise of any Right granted to Administrative
Agent or any Lender in any of the Loan Documents.

(c) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Administrative Agent considers
advisable, and in such cases, Administrative Agent will credit the Loan
Account with only the net amounts received by Administrative Agent in
payment of such disputed Accounts after deducting all Lender Group
Expenses incurred or expended in connection therewith;

(d) Cause Borrower to hold all returned Inventory in trust for the
Lenders, segregate all returned Inventory from all other assets of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of the Lender Group;

(e) Without notice to or demand upon Borrower, make such payments
and do such acts as Administrative Agent considers necessary or reasonable
to protect its security interests in the Collateral. Borrower agrees to
assemble the Personal Property Collateral if Administrative Agent so
requires, and to make the Personal Property Collateral available to
Administrative Agent at a place that Administrative Agent may designate
which is reasonably convenient to both parties. Borrower authorizes
Administrative Agent to enter the premises where the Personal Property
Collateral is located, to take and maintain possession of the Personal
Property Collateral, or any part of it, and to pay, purchase, contest, or
compromise any Lien that in Administrative Agent's determination appears
to conflict with Administrative Agent's Liens and to pay all expenses
incurred in connection therewith and to charge Borrower's Loan Account
therefor. With respect to any of Borrower's owned or leased premises,
Borrower hereby grants Administrative Agent a license to enter into
possession of such premises and to occupy the same, without charge, in
order to exercise any of the Lender Group's rights or remedies provided
herein, at law, in equity, or otherwise;

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52

(f) Without notice to Borrower (such notice being expressly waived),
and without constituting a retention of any collateral in satisfaction of
an obligation (within the meaning of the UCC), set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by the
Lenders, or (ii) Debt at any time owing to or for the credit or the
account of Borrower held by the Lenders;

(g) Hold, as cash collateral, any and all balances and deposits of
Borrower held by the Lender Group, to secure the full and final repayment
of all of the Obligations;

(h) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Personal Property Collateral. Borrower hereby grants to Administrative
Agent a license or other right to use, without charge, Borrower's labels,
patents, copyrights, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Personal Property Collateral, in completing production of,
advertising for sale, and selling any Personal Property Collateral and
Borrower's rights under all licenses and all franchise agreements shall
inure to the Lender Group's benefit;

(i) Sell the Personal Property Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions,
for cash or on terms, in such manner and at such places (including
Borrower's premises) as Administrative Agent determines is commercially
reasonable. It is not necessary that the Personal Property Collateral be
present at any such sale;

(j) Administrative Agent shall give notice of the disposition of the
Personal Property Collateral as follows:

(i) Administrative Agent shall give Borrower a notice in
writing of the time and place of public sale, or, if the sale is a
private sale or some other disposition other than a public sale is
to be made of the Personal Property Collateral, the time on or after
which the private sale or other disposition is to be made; and

(ii) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in SECTION 13, at least
five (5) days before the earliest time of disposition set forth in
the notice; no notice needs to be given prior to the disposition of
any portion of the Personal Property Collateral that is perishable
or threatens to decline speedily in value or that is of a type
customarily sold on a recognized market;

(iii) Administrative Agent, on behalf of the Lender Group may
credit bid and purchase at any public sale;

11.2 WAIVERS. To the extent permitted by Law, the Loan Parties hereby
waive presentment and demand for payment, protest, notice of intention to
accelerate, notice of acceleration, and notice of protest and nonpayment, and
agree that their respective liability with respect to the Obligation (or any
part thereof) shall not be affected by any renewal or extension in the time of
payment of the Obligation (or any part thereof), by any indulgence, or by any
release or change in any security for the payment of the Obligation (or any part
thereof).

11.3 PERFORMANCE BY ADMINISTRATIVE AGENT. If any covenant, duty, or
agreement of any Loan Party is not performed in accordance with the terms of the
Loan Documents, after the occurrence and during the continuance of an Event of
Default, Administrative Agent may, at its option (but subject to the approval of
Required Lenders), perform or attempt to perform such covenant, duty, or
agreement on

TERM LOAN AND SECURITY AGREEMENT

53

behalf of such Loan Party. In such event, any amount expended by Administrative
Agent in such performance or attempted performance shall be payable by the Loan
Parties, jointly and severally, to Administrative Agent on demand, shall become
part of the Obligation, and shall bear interest at the Post-Default Rate from
the date of such expenditure by Administrative Agent until paid. Notwithstanding
the foregoing, it is expressly understood that Administrative Agent does not
assume, and shall never have, except by its express written consent, any
liability or responsibility for the performance of any covenant, duty, or
agreement of any Borrower.

11.4 DELEGATION OF DUTIES; RELIANCE. Administrative Agent may perform any
of its duties or exercise any of its Rights under the Loan Documents by or
through its Representatives. Administrative Agent and its Representatives shall
(a) be entitled to rely upon (and shall be protected in relying upon) any
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telecopy, telegram, telex or teletype message, statement, order, or other
documents or conversation believed by it or them to be genuine and correct and
to have been signed or made by the proper Person and, with respect to legal
matters, upon opinion of counsel selected by Administrative Agent, (b) be
entitled to deem and treat each Lender as the owner and Lender of the Obligation
owed to such Lender for all purposes until, subject to SECTION 13.12, written
notice of the assignment or transfer thereof shall have been given to and
received by Administrative Agent (and any request, authorization, consent, or
approval of any Lender shall be conclusive and binding on each subsequent
Lender, assignee, or transferee of the Obligation owed to such Lender or portion
thereof until such notice is given and received), (c) not be deemed to have
notice of the occurrence of an Event of Default unless a responsible officer of
Administrative Agent, who handles matters associated with the Loan Documents and
transactions thereunder, has received written notice from a Lender or Borrower
and stating that such notice is a "Notice of Default," and (d) be entitled to
consult with legal counsel (including counsel for Borrower), independent
accountants, and other experts selected by Administrative Agent and shall not be
liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants, or experts.

11.5 NOT IN CONTROL. Nothing in any Loan Document shall, or shall be
deemed to (a) give Administrative Agent or any Lender the Right to exercise
control over the assets (including real property), affairs, or management of any
Loan Party, (b) preclude or interfere with compliance by any Loan Party thereof
with any Law, or (c) require any act or omission by any Loan Party thereof that
may be harmful to Persons or property. Any "Material Adverse Effect" or other
materiality qualifier in any representation, warranty, covenant, or other
provision of any Loan Document is included for credit documentation purposes
only and shall not, and shall not be deemed to, mean that Administrative Agent
or any Lender acquiesces in any non-compliance by any Loan Party with any Law or
document, or that Administrative Agent or any Lender does not expect the Loan
Parties to promptly, diligently, and continuously carry out all appropriate
removal, remediation, and termination activities required or appropriate in
accordance with all Environmental Laws. The Administrative Agent and the Lenders
have no fiduciary relationship with or fiduciary duty to any Loan Party arising
out of or in connection with the Loan Documents, and the relationship between
the Administrative Agent and the Lenders, on the one hand, and Loan Parties, on
the other hand, in connection with the Loan Documents is solely that of debtor
and creditor. The power of the Administrative Agent and Lenders under the Loan
Documents is limited to the Rights provided in the Loan Documents, which Rights
exist solely to assure payment and performance of the Obligation and may be
exercised in a manner calculated by the Administrative Agent and Lenders in
their respective good faith business judgment.

11.6 COURSE OF DEALING. The acceptance by Administrative Agent or Lenders
at any time and from time to time of partial payment on the Obligation shall not
be deemed to be a waiver of any Event of Default then existing. No waiver by
Administrative Agent, Required Lenders, or Lenders of any Event of Default shall
be deemed to be a waiver of any other then-existing or subsequent Event of
Default. No delay or omission by Administrative Agent, Required Lenders, or
Lenders in exercising any Right under

TERM LOAN AND SECURITY AGREEMENT

54

the Loan Documents shall impair such Right or be construed as a waiver thereof
or any acquiescence therein, nor shall any single or partial exercise of any
such Right preclude other or further exercise thereof, or the exercise of any
other Right under the Loan Documents or otherwise.

11.7 CUMULATIVE RIGHTS. All Rights available to Administrative Agent and
Lenders under the Loan Documents are cumulative of and in addition to all other
Rights granted to Administrative Agent and Lenders at law or in equity, whether
or not the Obligation is due and payable and whether or not Administrative Agent
or Lenders have instituted any suit for collection, foreclosure, or other action
in connection with the Loan Documents.

11.8 APPLICATION OF PROCEEDS. Any and all proceeds ever received by
Administrative Agent or Lenders from the exercise of any Rights pertaining to
the Obligation shall be applied to the Obligation in the order and manner set
forth in SECTION 3.9.

11.9 CERTAIN PROCEEDINGS. Each Loan Party will promptly execute and
deliver, or cause the execution and delivery of, all applications, certificates,
instruments, registration statements, and all other documents and papers
Administrative Agent or Lenders may reasonably request in connection with the
obtaining of any consent, approval, registration, qualification, permit,
license, or Authorization of any Governmental Authority or other Person
necessary or appropriate for the effective exercise of any Rights under the Loan
Documents. Because the Loan Parties agree that Administrative Agent's and
Lenders' remedies at Law for failure of the Loan Parties to comply with the
provisions of this Section would be inadequate and that such failure would not
be adequately compensable in damages, the Loan Parties agree that the covenants
of this Section may be specifically enforced.

11.10 EXPENDITURES BY LENDERS. Borrower shall promptly pay within fifteen
(15) Business Days after request therefor (a) all reasonable costs, fees, and
expenses paid or incurred by Administrative Agent, incident to any Loan Document
(including, but not limited to, the reasonable fees and expenses of counsel to
Administrative Agent in connection with the negotiation, preparation, delivery,
execution, coordination, and administration of the Loan Documents and any
related amendment, waiver, or consent) and (b) all reasonable costs and expenses
of Lenders and Administrative Agent incurred by Administrative Agent or any
Lender in connection with the enforcement of the obligations of any Borrower
arising under the Loan Documents (including, without limitation, costs and
expenses incurred in connection with any workout or bankruptcy) or the exercise
of any Rights arising under the Loan Documents (including, but not limited to,
reasonable attorneys' fees including allocated cost of internal counsel, court
costs, and other costs of collection), all of which shall be a part of the
Obligation and shall bear interest at the Post-Default Rate from the date due
until the date repaid.

11.11 INDEMNIFICATION. Borrower agrees, to indemnify and hold harmless
Administrative Agent, and each Lender, and each of their respective affiliates
and their respective officers, directors, employees, agents, attorneys, and
advisors (each, an "Indemnified Party") from and against any and all claims,
damages, losses, liabilities (including, without limitation, any Environmental
Liabilities), costs, and expenses (including, without limitation, reasonable
attorneys' fees) that may be incurred by or asserted or awarded against any
Indemnified Party, in each case arising out of or in connection with or by
reason of (including, without limitation, in connection with any investigation,
litigation, or proceeding or preparation of defense in connection therewith) the
Loan Documents, any of the transactions contemplated herein or the actual or
proposed use of the proceeds of the Borrowings (including any of the foregoing
arising from the negligence of the Indemnified Party), except to the extent such
claim, damage, loss, liability, cost, or expense is found in a final,
non-appealable judgment by a court of competent jurisdiction to have resulted
from such Indemnified Party's gross negligence or willful misconduct. In the
case of an investigation, litigation, or other proceeding to which the indemnity
in this SECTION 11.11

TERM LOAN AND SECURITY AGREEMENT

55

applies, such indemnity shall be effective whether or not such investigation,
litigation, or proceeding is brought by Borrower, any other Loan Party, their
directors, shareholders, or creditors or an Indemnified Party or any other
Person or any Indemnified Party is otherwise a party thereto and whether or not
the transactions contemplated hereby are consummated. Borrower agrees not to
assert any claim against any indemnified party on any theory of liability, for
special, indirect, consequential, or punitive damages arising out of or
otherwise relating to the Loan Documents, any of the transactions contemplated
herein or the actual or proposed use of the proceeds of the Borrowings. Without
prejudice to the survival of any other agreement of the Loan Parties hereunder,
the agreements and obligations of the Loan Parties contained in this SECTION
11.11 shall survive the payment in full of the Borrowings and all other amounts
payable under the Loan Documents.

SECTION 12. AGREEMENT AMONG LENDERS.

12.1 ADMINISTRATIVE AGENT.

(a) Appointment of Administrative Agent. Each Lender hereby appoints
Mid River LLC (and Mid River LLC hereby accepts such appointment) as its
nominee and agent, in its name and on its behalf: (i) to act as nominee
for and on behalf of such Lender in and under all Loan Documents; (ii) to
arrange the means whereby the funds of Lenders are to be made available to
Borrower under the Loan Documents; (iii) to take such action as may be
requested by any Lender under the Loan Documents (when such Lender is
entitled to make such request under the Loan Documents and after such
requesting Lender has obtained the concurrence of such other Lenders as
may be required under the Loan Documents); (iv) to receive all documents
and items to be furnished to Lenders under the Loan Documents; (v) to
timely distribute, and Administrative Agent agrees to so distribute, to
each Lender all material information, requests, documents, and items
received from Borrower under the Loan Documents; (vi) to promptly
distribute to each Lender its ratable part of each payment or prepayment
(whether voluntary, as proceeds of Collateral upon or after foreclosure,
as proceeds of insurance thereon, or otherwise) in accordance with the
terms of the Loan Documents; and (vii) to deliver to the appropriate
Persons requests, demands, approvals, and consents received from Lenders;
provided, however, Administrative Agent shall not be required to take any
action which exposes Administrative Agent to personal liability or which
is contrary to the Loan Documents or applicable Law.

(b) Resignation or Removal of Administrative Agent. Successor
Administrative Agent. Administrative Agent may resign at any time with or
without cause as Administrative Agent under the Loan Documents by giving
written notice thereof to Lenders and may be removed as Administrative
Agent under the Loan Documents at any time with cause by Required Lenders.
Should the initial or any successor Administrative Agent ever cease to be
a party hereto or should the initial or any successor Administrative Agent
ever resign or be removed as Administrative Agent, then Required Lenders
shall elect the successor Administrative Agent from among the Lenders
(other than the resigning Administrative Agent). If no successor
Administrative Agent shall have been so appointed by Required Lenders,
within 30 days after the retiring Administrative Agent's giving of notice
of resignation or Required Lenders' removal of the retiring Administrative
Agent, then the retiring Administrative Agent may, on behalf of Lenders,
appoint a successor Administrative Agent. Upon the acceptance of any
appointment as Administrative Agent under the Loan Documents by a
successor Administrative Agent, such successor Administrative Agent shall
thereupon succeed to and become vested with all the Rights of the retiring
Administrative Agent, and the retiring Administrative Agent shall be
discharged from its duties and obligations of Administrative Agent under
the Loan Documents, and each Lender shall execute such documents as any
Lender may reasonably request to reflect such change in and under the Loan
Documents. After any retiring Administrative Agent's resignation

TERM LOAN AND SECURITY AGREEMENT

56

or removal as Administrative Agent under the Loan Documents, the
provisions of this SECTION 12 shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Administrative Agent under
the Loan Documents.

(c) Administrative Agent as a Lender. Non-Fiduciary. Administrative
Agent, in its capacity as a Lender, shall have the same Rights under the
Loan Documents as any other Lender and may exercise the same as though it
were not acting as Administrative Agent; the term "Lender" shall, unless
the context otherwise indicates, include Administrative Agent; and any
resignation, or removal of Administrative Agent hereunder shall not impair
or otherwise affect any Rights which it has or may have in its capacity as
an individual Lender. Each Lender and Borrower agree that Administrative
Agent is not a fiduciary for Lenders or for Borrower but simply is acting
in the capacity described herein to alleviate administrative burdens for
both Borrower and Lenders, that Administrative Agent has no duties or
responsibilities to Lenders or Borrower except those expressly set forth
herein, and that Administrative Agent in its capacity as a Lender has all
Rights of any other Lender.

(d) Other Activities of Administrative Agent. Administrative Agent
and its Affiliates may now or hereafter be engaged in one or more loan,
letter of credit, leasing, or other financing transactions with Borrower,
act as trustee or depositary for Borrower, or otherwise be engaged in
other transactions with Borrower (collectively, the "OTHER ACTIVITIES")
not the subject of the Loan Documents. Without limiting the Rights of
Lenders specifically set forth in the Loan Documents, Administrative Agent
and its Affiliates shall not be responsible to account to Lenders for such
other activities, and no Lender shall have any interest in any other
activities, any present or future guaranties by or for the account of
Borrower which are not contemplated or included in the Loan Documents, any
present or future offset exercised by Administrative Agent and its
Affiliates in respect of such other activities, any present or future
property taken as security for any such other activities, or any property
now or hereafter in the possession or control of Administrative Agent or
its Affiliates which may be or become security for the obligations of
Borrower arising under the Loan Documents by reason of the general
description of indebtedness secured or of property contained in any other
agreements, documents, or instruments related to any such other
activities; provided that, if any payments in respect of such guaranties
or such property or the proceeds thereof shall be applied to reduction of
the Obligation, then each Lender shall be entitled to share in such
application ratably.

12.2 EXPENSES. Upon demand by Administrative Agent, each Lender shall pay
its ratable portion (determined as of the date reimbursement is sought
hereunder) of any reasonable expenses (including, without limitation, court
costs, reasonable attorneys' fees, and other costs of collection) incurred by
Administrative Agent in connection with any of the Loan Documents if and to the
extent such Administrative Agent does not receive reimbursement therefor from
other sources within 60 days after incurred; provided that, each Lender shall be
entitled to receive its ratable portion of any reimbursement for such expenses,
or part thereof, which Administrative Agent subsequently receives from such
other sources.

12.3 PROPORTIONATE ABSORPTION OF LOSSES. Except as otherwise provided in
the Loan Documents, nothing in the Loan Documents shall be deemed to give any
Lender any advantage over any other Lender insofar as the Obligation is
concerned, or to relieve any Lender from absorbing its ratable portion of any
losses sustained with respect to the Obligation (except to the extent such
losses result from unilateral actions or inactions of any Lender that are not
made in accordance with the terms and provisions of the Loan Documents).

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57

12.4 DELEGATION OF DUTIES; RELIANCE. Administrative Agent may perform any
of its duties or exercise any of its Rights under the Loan Documents by or
through its Representatives. Administrative Agent and its Representatives shall
(a) be entitled to rely upon (and shall be protected in relying upon) any
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telecopy, telegram, telex or teletype message, statement, order, or other
documents or conversation believed by it or them to be genuine and correct and
to have been signed or made by the proper Person and, with respect to legal
matters, upon opinion of counsel selected by Administrative Agent, (b) be
entitled to deem and treat each Lender as the owner and Lender of the Obligation
owed to such Lender for all purposes until, subject to SECTION 13.12, written
notice of the assignment or transfer thereof shall have been given to and
received by Administrative Agent (and any request, authorization, consent, or
approval of any Lender shall be conclusive and binding on each subsequent
Lender, assignee, or transferee of the Obligation owed to such Lender or portion
thereof until such notice is given and received), (c) not be deemed to have
notice of the occurrence of an Event of Default or Potential Default unless a
responsible officer of Administrative Agent, who handles matters associated with
the Loan Documents and transactions thereunder, has received written notice from
a Lender or Borrower and stating that such notice is a "Notice of Default," and
(d) be entitled to consult with legal counsel (including counsel for Borrower),
independent accountants, and other experts selected by Administrative Agent and
shall not be liable for any action taken or omitted to be taken in good faith by
it in accordance with the advice of such counsel, accountants or experts.

12.5 LIMITATION OF LIABILITY.

(a) General. Neither Administrative Agent nor any of its
Representatives shall be liable for any action taken or omitted to be
taken by it or them under the Loan Documents in good faith and reasonably
believed by it or them to be within the discretion or power conferred upon
it or them by the Loan Documents or be responsible for the consequences of
any error of judgment, except for fraud, gross negligence, or willful
misconduct; and neither Administrative Agent nor any of its
Representatives has a fiduciary relationship with any Lender by virtue of
the Loan Documents (provided that, nothing herein shall negate the
obligation of Administrative Agent to account for funds received by it for
the account of any Lender).

(b) Non-Discretionary Actions, Indemnification. Unless indemnified
to its satisfaction against loss, cost, liability, and expense,
Administrative Agent shall not be compelled to do any act under the Loan
Documents or to take any action toward the execution or enforcement of the
powers thereby created or to prosecute or defend any suit in respect of
the Loan Documents. If Administrative Agent requests instructions from
Lenders or Required Lenders, as the case may be, with respect to any act
or action (including, but not limited to, any failure to act) in
connection with any Loan Document, Administrative Agent shall be entitled
(but shall not be required) to refrain (without incurring any liability to
any Person by so refraining) from such act or action unless and until it
has received such instructions. Except where action of Required Lenders or
all Lenders is required in the Loan Documents, Administrative Agent may
act hereunder in its own discretion without requesting instructions. In no
event, however, shall Administrative Agent or any of its Representatives
be required to take any action which it or they determine could incur for
it or them criminal or onerous civil liability. Without limiting the
generality of the foregoing, no Lender shall have any right of action
against Administrative Agent as a result of Administrative Agent's acting
or refraining from acting hereunder in accordance with the instructions of
Required Lenders (or all Lenders if required in the Loan Documents).

(c) Independent Credit Decision. Administrative Agent shall not be
responsible in any manner to any Lender or any Participant for, and each
Lender represents and warrants that it has not relied upon Administrative
Agent in respect of, (i) the creditworthiness of any Borrower

TERM LOAN AND SECURITY AGREEMENT

58

and the risks involved to such Lender, (ii) the effectiveness,
enforceability, genuineness, validity, or the due execution of any Loan
Document, (iii) any representation, warranty, document, certificate,
report, or statement made therein or furnished thereunder or in connection
therewith, (iv) the existence, priority, or perfection of any Lien
hereafter granted or purported to be granted under any Loan Document, or
(v) observation of or compliance with any of the terms, covenants, or
conditions of any Loan Document on the part of any Borrower. Each Lender
agrees to indemnify Administrative Agent and its Representatives and hold
them harmless from and against (but limited to such Lender's Pro Rata Part
of) any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, reasonable expenses, and reasonable
disbursements of any kind or nature whatsoever which may be imposed on,
asserted against, or incurred by them in any way relating to or arising
out of the Loan Documents or any action taken or omitted by them under the
Loan Documents (INCLUDING ANY OF THE FOREGOING ARISING FROM THE NEGLIGENCE
OF ADMINISTRATIVE AGENT OR ITS REPRESENTATIVES), to the extent
Administrative Agent and its Representatives are not reimbursed for such
amounts by any Borrower (provided that, Administrative Agent and its
Representatives shall not have the Right to be indemnified hereunder for
its or their own fraud, gross negligence, or willful misconduct).

12.6 EVENT OF DEFAULT; COLLATERAL.

(a) Upon the occurrence and continuance of an Event of Default,
Lenders agree to promptly confer in order that Required Lenders or
Lenders, as the case may be, may agree upon a course of action for the
enforcement of the Rights of Lenders; and Administrative Agent shall be
entitled to refrain from taking any action (without incurring any
liability to any Person for so refraining) unless and until Administrative
Agent shall have received instructions from Required Lenders. All Rights
of action under the Loan Documents and all Rights to the Collateral, if
any, hereunder may be enforced by Administrative Agent and any suit or
proceeding instituted by Administrative Agent in furtherance of such
enforcement shall be brought in its name as Administrative Agent without
the necessity of joining as plaintiffs or defendants any Lender, and the
recovery of any judgment shall be for the benefit of Lenders subject to
the expenses of Administrative Agent. In actions with respect to any
property of the Loan Parties, Administrative Agent is acting for the
ratable benefit of each Lender. Any and all agreements to subordinate
(whether made heretofore or hereafter) other indebtedness or obligations
of the Loan Parties to the Obligation shall be construed as being for the
ratable benefit of each Lender.

(b) Each Lender authorizes and directs Administrative Agent to enter
into the Collateral Documents for the benefit of the Lenders. Except to
the extent unanimity or a supermajority is required hereunder, each Lender
agrees that any action taken by the Required Lenders in accordance with
the provisions of the Loan Documents, and the exercise by the Required
Lenders of the powers set forth herein or therein, together with such
other powers as are reasonably incidental thereto, shall be authorized and
binding upon all of the Lenders.

(c) Administrative Agent is hereby authorized on behalf of all of
the Lenders, without the necessity of any notice to or further consent
from any Lender, from time to time to take any action with respect to any
Collateral or Collateral Documents which may be necessary to perfect and
maintain perfected the Liens upon the Collateral granted pursuant to the
Collateral Documents.

(d) Administrative Agent shall have no obligation whatsoever to any
Lender or to any other Person to assure that the Collateral exists or is
owned by any Borrower or is cared for, protected, or insured or has been
encumbered or that the Liens granted to Administrative Agent herein or
pursuant hereto have been properly or sufficiently or lawfully created,
perfected,

TERM LOAN AND SECURITY AGREEMENT

59

protected, or enforced, or are entitled to any particular priority, or to
exercise at all or in any particular manner or under any duty of care,
disclosure, or fidelity, or to continue exercising, any of the Rights
granted or available to Administrative Agent in this SECTION 12.6 or in
any of the Collateral Documents; it being understood and agreed that in
respect of the Collateral, or any act, omission, or event related thereto,
Administrative Agent may act in any manner it may deem appropriate, in its
sole discretion, given Administrative Agent's own interest in the
Collateral as one of the Lenders and that Administrative Agent shall have
no duty or liability whatsoever to any Lender, other than to act without
gross negligence or willful misconduct.

(e) Lenders hereby irrevocably authorize Administrative Agent, at
its option and in its discretion, to release any Lien granted to or held
by Administrative Agent upon any Collateral: (i) upon payment and
satisfaction of the Obligation; (ii) constituting property in which no
Borrower or Parent owned an interest at the time the Lien was granted or
at any time thereafter; (iii) upon the sale, transfer, or disposition of
Collateral which is expressly permitted pursuant to the Loan Documents; or
(iv) if approved, authorized, or ratified in writing by all necessary
Lenders. Upon request by Administrative Agent at any time, Lenders will
confirm in writing Administrative Agent's authority to release particular
types or items of Collateral pursuant to this SECTION 12.6.

(f) In furtherance of the authorizations set forth in this SECTION
12.6, each Lender hereby irrevocably appoints Administrative Agent its
attorney-in-fact, with full power of substitution, for and on behalf of
and in the name of each such Lender, (i) to enter into Collateral
Documents (including, without limitation, any appointments of substitute
trustees under any Collateral Document), (ii) to take action with respect
to the Collateral and Collateral Documents to perfect, maintain, and
preserve Lender's Liens, and (iii) to execute instruments of release or to
take other action necessary to release Liens upon any Collateral to the
extent authorized in PARAGRAPH (e) hereof. This power of attorney shall be
liberally, not restrictively, construed so as to give the greatest
latitude to Administrative Agent's power, as attorney, relative to the
Collateral matters described in this SECTION 12.6. The powers and
authorities herein conferred on Administrative Agent may be exercised by
Administrative Agent through any Person who, at the time of the execution
of a particular instrument, is an officer of Administrative Agent. The
power of attorney conferred by this SECTION 12.6(f) is granted for
valuable consideration and is coupled with an interest and is irrevocable
so long as the Obligation, or any part thereof, shall remain unpaid or
Lenders are obligated to make any Borrowings under the Loan Documents.

12.7 LIMITATION OF LIABILITY. To the extent permitted by Law, (a)
Administrative Agent (acting in its agent capacity) shall not incur any
liability to any other Lender or Participant except for acts or omissions
resulting from its own fraud, gross negligence or willful misconduct, and (b)
neither Administrative Agent nor any Lender or Participant shall incur any
liability to any other Person for any act or omission of any other Lender or
Participant.

12.8 RELATIONSHIP OF LENDERS. Nothing herein shall be construed as
creating a partnership or joint venture among Administrative Agent and Lenders.

12.9 BENEFITS OF AGREEMENT. None of the provisions of this SECTION 12
shall inure to the benefit of any Borrower or any other Person other than
Lenders; consequently, no Borrower or any other Person shall be entitled to rely
upon, or to raise as a defense, in any manner whatsoever, the failure of
Administrative Agent or any Lender to comply with such provisions.

TERM LOAN AND SECURITY AGREEMENT

60

12.10 OBLIGATIONS SEVERAL. The obligations of Lenders hereunder are
several, and each Lender hereunder shall not be responsible for the obligations
of the other Lenders hereunder, nor will the failure of one Lender to perform
any of its obligations hereunder relieve the other Lenders from the performance
of their respective obligations hereunder.

SECTION 13. MISCELLANEOUS.

13.1 HEADINGS. The headings, captions, and arrangements used in any of the
Loan Documents are, unless specified otherwise, for convenience only and shall
not be deemed to limit, amplify, or modify the terms of the Loan Documents, nor
affect the meaning thereof.

13.2 NONBUSINESS DAYS. In any case where any payment or action is due
under any Loan Document on a day which is not a Business Day, such payment or
action may be delayed until the next-succeeding Business Day, but interest and
fees shall continue to accrue in respect of any payment to which it is
applicable until such payment is in fact made.

13.3 COMMUNICATIONS. Unless otherwise specifically provided herein or any
other Loan Document, all notices shall be in writing addressed to the respective
party as set forth below and may be personally served, faxed, telecopied, or
sent by overnight courier service or United States mail and shall be deemed to
have been given: (a) if delivered in person, when delivered; (b) if delivered by
fax or telecopy, on the date of transmission if transmitted on a Business Day
before 4:00 p.m. New York time or, if not, on the next succeeding Business Day;
(c) if delivered by overnight courier, the next succeeding Business Day after
delivery to such courier properly addressed; or (d) if by U.S. Mail, four (4)
Business Days after depositing in the United States mail, with postage prepaid
and properly addressed.

If to Borrower:

Panaco, Inc.
c/o National Energy Group, Inc.
Attn: Philip D. Devlin
1400 One Energy Square
4925 Greenville Avenue
Dallas, TX 75206
Fax/Telecopy No.: (214) 692-3910

If to Administrative Agent:

Mid River LLC
767 Fifth Ave., 47th Floor
New York, NY 10153
Attn:  Keith Schaitkin
Fax/Telecopy No.: (212) 488-1158

With a copy to:

Haynes and Boone, LLP
901 Main Street
Suite 3100
Dallas, Texas  75202
Attn:  Jeffrey L. Curtis

TERM LOAN AND SECURITY AGREEMENT

61

Fax/Telecopy No.: 214/200-0720

If to any Lender: Its address indicated on SCHEDULE 2.1, in an Assignment
and Acceptance Agreement, or in a notice to Administrative Agent and Borrowers
or to such other address as the party addressed shall have previously designated
by written notice to the serving party, given in accordance with this SECTION
13.3.

13.4 FORM AND NUMBER OF DOCUMENTS. Each agreement, document, instrument,
or other writing to be furnished under any provision of the Loan Documents must
be in form and substance and in such number of counterparts as may be reasonably
satisfactory to Administrative Agent and its counsel.

13.5 SURVIVAL. All covenants, agreements, undertakings, representations,
and warranties made in any of the Loan Documents shall survive all closings
under the Loan Documents and, except as otherwise indicated, shall not be
affected by any investigation made by any party. All Rights of, and provisions
relating to, reimbursement and indemnification of Administrative Agent or any
Lender (and any other provision of the Loan Documents that expressly provides
for such survival) shall survive termination of this Agreement, payment in full
of the Obligation, and any assignment by any Lender.

13.6 GOVERNING LAW. The Loan Documents have been entered into pursuant to
Section 5-1401 of the New York General Obligations Law and the substantive laws
of the State of New York (except to the extent the laws of another jurisdiction
govern the creation, perfection, validity, or enforcement of Liens under the
Collateral Documents), and the applicable federal laws of the United States of
America shall govern the validity, construction, enforcement and interpretation
of the Loan Documents.

13.7 INVALID PROVISIONS. If any provision in any Loan Document is held to
be illegal, invalid, or unenforceable, such provision shall be fully severable;
the appropriate Loan Document shall be construed and enforced as if such
provision had never comprised a part thereof; and the remaining provisions
thereof shall remain in full force and effect and shall not be affected by such
provision or by its severance therefrom. Administrative Agent, Lenders, and each
Borrower party to such Loan Document agree to negotiate, in good faith, the
terms of a replacement provision as similar to the severed provision as may be
possible and be legal, valid, and enforceable.

13.8 ENTIRETY. THE RIGHTS AND OBLIGATIONS OF EACH BORROWER, LENDERS, AND
ADMINISTRATIVE AGENT SHALL BE DETERMINED SOLELY FROM WRITTEN AGREEMENTS,
DOCUMENTS, AND INSTRUMENTS, AND ANY PRIOR ORAL AGREEMENTS BETWEEN SUCH PARTIES
ARE SUPERSEDED BY AND MERGED INTO SUCH WRITINGS. THIS AGREEMENT (AS AMENDED IN
WRITING FROM TIME TO TIME) AND THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED BY ANY
LOAN PARTY, ANY LENDER, AND/OR ADMINISTRATIVE AGENT (TOGETHER WITH ALL
COMMITMENT LETTERS AND FEE LETTERS AS THEY RELATE TO THE PAYMENT OF FEES AFTER
THE CLOSING DATE) REPRESENT THE FINAL AGREEMENT BETWEEN THE LOAN PARTIES,
LENDERS, AND ADMINISTRATIVE AGENT, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY SUCH PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN SUCH PARTIES.

13.9 JURISDICTION; VENUE; SERVICE OF PROCESS; JURY TRIAL. EACH PARTY
HERETO (INCLUDING EACH GUARANTOR BY EXECUTION OF A GUARANTY), IN EACH CASE FOR
ITSELF, ITS SUCCESSORS AND ASSIGNS, HEREBY (A) IRREVOCABLY SUBMITS TO THE
NONEXCLUSIVE JURISDICTION OF THE STATE (PURSUANT TO SECTION 5-1402 OF THE NEW
YORK GENERAL OBLIGATIONS LAW) AND FEDERAL COURTS LOCATED IN THE BOROUGH OF
MANHATTAN IN THE STATE OF NEW YORK, AND AGREES AND CONSENTS THAT SERVICE OF
PROCESS MAY BE MADE UPON IT IN ANY LEGAL PROCEEDING

TERM LOAN AND SECURITY AGREEMENT

62

ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS AND THE OBLIGATION BY
SERVICE OF PROCESS AS PROVIDED BY NEW YORK LAW, (B) IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY LITIGATION ARISING OUT OF OR IN CONNECTION
WITH THE LOAN DOCUMENTS AND THE OBLIGATION BROUGHT IN ANY SUCH COURT, (C)
IRREVOCABLY WAIVES ANY CLAIMS THAT ANY LITIGATION BROUGHT IN ANY SUCH COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM, (D) AGREES TO DESIGNATE AND MAINTAIN AN
AGENT FOR SERVICE OF PROCESS IN NEW YORK IN CONNECTION WITH ANY SUCH LITIGATION
AND TO DELIVER TO ADMINISTRATIVE AGENT EVIDENCE THEREOF, IF REQUESTED, (E)
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH LITIGATION BY THE MAILING OF COPIES THEREOF BY CERTIFIED
MAIL, RETURN RECEIPT REQUESTED, POSTAGE PREPAID, AT ITS ADDRESS SET FORTH
HEREIN, (F) IRREVOCABLY AGREES THAT ANY LEGAL PROCEEDING AGAINST ANY PARTY
HERETO ARISING OUT OF OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE OBLIGATION
SHALL BE BROUGHT IN ONE OF THE AFOREMENTIONED COURTS, AND (G) IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ITS RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY LOAN
DOCUMENT OR THE TRANSACTIONS CONTEMPLATED thereby. The scope of each of the
foregoing waivers is intended to be all-encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of this
transaction, including, without limitation, contract claims, tort claims, breach
of duty claims, and all other common law and statutory claims. The Loan Parties
and each other party to the Loan Documents acknowledge that this waiver is a
material inducement to the agreement of each party hereto to enter into a
business relationship, that each has already relied on this waiver in entering
into the Loan Documents, and each will continue to rely on each of such waivers
in related future dealings. The Loan Parties and each other party to the Loan
Documents warrant and represent that they have reviewed these waivers with their
legal counsel, and that they knowingly and voluntarily agree to each such waiver
following consultation with legal counsel. THE WAIVERS IN THIS SECTION 13.9 ARE
IRREVOCABLE, MEANING THAT THEY MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THESE WAIVERS SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS, AND
REPLACEMENTS TO OR OF THIS OR ANY OTHER LOAN DOCUMENT. In the event of
Litigation, this Agreement may be filed as a written consent to a trial by the
court.

13.10 AMENDMENTS, CONSENTS, CONFLICTS, AND WAIVERS.

(a) Except as otherwise specifically provided in this SECTION 13.10
or otherwise in the Loan Documents, (i) this Agreement may only be
amended, modified, or waived by an instrument in writing executed jointly
by Borrower and Required Lenders, and, in the case of any matter affecting
Administrative Agent (except removal of Administrative Agent as provided
in SECTION 13) by Administrative Agent, and may only be supplemented by
documents delivered or to be delivered in accordance with the express
terms hereof, and (ii) the other Loan Documents may only be the subject of
an amendment, modification, or waiver if Borrower and Required Lenders,
and, in the case of any matter affecting Administrative Agent (except as
set forth above), such Administrative Agent, have approved same.

(b) Any amendment to or consent or waiver under any Loan Document
which purports to accomplish any of the following must be approved by
Borrower and by each Lender adversely affected thereby, and, in the case
of any matter affecting Administrative Agent, by Administrative Agent: (i)
postpones or delays any date fixed by the Loan Documents for any payment
of all or any part of the Obligation payable to such Lender or
Administrative Agent; (ii) reduces the interest rate or decreases the
amount of any payment of principal, interest, fees, or other sums payable
to Administrative Agent or any such Lender hereunder (except such
reductions as are contemplated by this Agreement); (iii) changes the
definition of "REQUIRED

TERM LOAN AND SECURITY AGREEMENT

63

LENDERS" or this SECTION 13.10(b) or any other provisions of the Loan
Documents that require the unanimous consent of the Lenders; (iv) changes
the order of application of any payment or prepayment set forth in
SECTIONS 3.3 and 3.12 in any manner that adversely affects such Lender or
Administrative Agent; or (v) releases all or a substantial portion of the
Collateral. Without the consent of such Lender, no Lender's "COMMITMENT
PERCENTAGE" may be increased.

(c) Any conflict or ambiguity between the terms and provisions of
this Agreement and terms and provisions in any other Loan Document shall
be controlled by the terms and provisions herein.

(d) No course of dealing nor any failure or delay by Administrative
Agent, any Lender, or any of their respective Representatives with respect
to exercising any Right of Administrative Agent or any Lender hereunder
shall operate as a waiver thereof. A waiver must be in writing and signed
by Administrative Agent and requisite Lenders to be effective, and such
waiver will be effective only in the specific instance and for the
specific purpose for which it is given.

13.11 MULTIPLE COUNTERPARTS. The Loan Documents may be executed in a
number of identical counterparts, each of which shall be deemed an original for
all purposes and all of which constitute, collectively, one agreement; but, in
making proof of any Loan Document, it shall not be necessary to produce or
account for more than one such counterpart. It is not necessary that each Lender
execute the same counterpart so long as identical counterparts are executed by
Borrower, each Lender, and each Co-Administrative Agent. This Agreement shall
become effective when counterparts hereof shall have been executed and delivered
to Administrative Agent by each Lender, Administrative Agent, and Borrower, or,
when Administrative Agent shall have received telecopied, telexed, or other
evidence satisfactory to it that such party has executed and is delivering to
Administrative Agent a counterpart hereof.

13.12 SUCCESSORS AND ASSIGNS; ASSIGNMENTS AND PARTICIPATIONS.

(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns hereby, except that Borrower may not, assign or otherwise transfer
any of its Rights or obligations hereunder without the prior written
consent of each Lender. Nothing in this Agreement, expressed or implied,
shall be construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby,
Participants to the extent provided in SECTION 13.12(d) and, to the extent
expressly contemplated hereby, the Affiliates of each of the
Administrative Agent and the Lenders) any legal or equitable Right,
remedy, or claim under or by reason of this Agreement.

(b) Any Lender may at any time assign to one or more Persons all or
a portion of its Rights and obligations under this Agreement (including
all or a portion of the Term Loan Principal Debt owing to it). The parties
to each assignment by a Lender shall execute and deliver to Administrative
Agent an Assignment and Assumption.

(c) Any Lender may at any time, without the consent of, or notice
to, Borrower or Administrative Agent, sell participations to any Person
(other than a natural person or Borrower or any of Borrowers' Affiliates
or Subsidiaries) (each, a "PARTICIPANT") in all or a portion of such
Lender's Rights and/or obligations under this Agreement (including all or
a portion of the Term Loan Principal Debt owing to it); provided that (i)
such Lender's obligations under this Agreement shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, and (iii) Borrower,
Administrative Agent, and the other Lenders shall continue to deal solely
and directly with such Lender in connection

TERM LOAN AND SECURITY AGREEMENT

64

with such Lender's Rights and obligations under this Agreement. Any
agreement or instrument pursuant to which a Lender sells such a
participation shall provide that such Lender shall retain the sole Right
to enforce this Agreement and to approve any amendment, modification, or
waiver of any provision of this Agreement; provided that such agreement or
instrument may provide that such Lender will not, without the consent of
the Participant, agree to any amendment, modification, or waiver with
respect to the following: extending the due date for payment of any amount
in respect of principal (other than mandatory prepayments), interest, or
fees due under the Loan Documents, reducing the interest rate or the
amount of principal or fees applicable to the Obligation (except such
reductions as are contemplated by the Loan Documents), or releasing all or
any substantial portion of the Collateral for the Obligation under the
Loan that affects such Participant. Borrower agrees that each Participant
shall be entitled to the benefits of SECTION 4 to the same extent as if it
were a Lender and had acquired its interest by assignment.

(d) Any Lender may at any time pledge or assign a security interest
in all or any portion of its Rights under this Agreement to secure
obligations of such Lender, including without limitation any pledge or
assignment to secure obligations to a Federal Reserve Bank; provided that
no such pledge or assignment shall release such Lender from any of its
obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party hereto.

13.13 UNIFORM COMMERCIAL CODE. References to the "UCC" or "Uniform
Commercial Code" in the Collateral Documents shall be to the Uniform Commercial
Code as in effect from time to time in the State of New York or, when the
context implies, the Uniform Commercial Code as in effect from time to time in
any other applicable jurisdiction. References to the provisions of the "UCC" or
"Uniform Commercial Code" in the Collateral Documents shall include all
successor provisions under any subsequent version or amendment to any Article of
the Uniform Commercial Code.

13.14 DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN
CIRCUMSTANCES. The obligations of Borrower under the Loan Documents shall remain
in full force and effect until payment in full of the Term Loan Principal Debt
and of all interest, fees, and other amounts of the Obligation then due and
owing, except that SECTIONS 4, 11, and 12, and any other provisions under the
Loan Documents expressly intended to survive by the terms hereof or by the terms
of the applicable Loan Documents, shall survive such termination. If at any time
any payment of the principal of or interest on any Note or any other amount
payable by any Borrower under any Loan Document is rescinded or must be
otherwise restored or returned upon the insolvency, bankruptcy, or
reorganization of such Borrower or otherwise, the obligations of each Borrower
under the Loan Documents with respect to such payment shall be reinstated as
though such payment had been due but not made at such time.

[REMAINDER OF PAGE INTENTIONALLY BLANK;
SIGNATURE PAGE(s) TO FOLLOW.]

TERM LOAN AND SECURITY AGREEMENT

65

13.15 UNIFORM COMMERCIAL CODE. References to the "UCC" or "Uniform
Commercial Code" in the Collateral Documents shall be to the Uniform Commercial
Code as in effect from time to time in the State of New York or, when the
context implies, the Uniform Commercial Code as in effect from time to time in
any other applicable jurisdiction. References to the provisions of the "UCC" or
"Uniform Commercial Code" in the Collateral Documents shall include all
successor provisions under any subsequent version or amendment to any Article of
the Uniform Commercial Code.

13.16 DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN
CIRCUMSTANCES. The obligations of Borrower under the Loan Documents shall remain
in full force and effect until payment in full of the Term Loan Principal Debt
and of all interest, fees, and other amounts of the Obligation then due and
owing, except that SECTIONS 4, 11, and 12, and any other provisions under the
Loan Documents expressly intended to survive by the terms hereof or by the terms
of the applicable Loan Documents, shall survive such termination. If at any time
any payment of the principal of or interest on any Note or any other amount
payable by any Borrower under any Loan Document is rescinded or must be
otherwise restored or returned upon the insolvency, bankruptcy, or
reorganization of such Borrower or otherwise, the obligations of each Borrower
under the Loan Documents with respect to such payment shall be reinstated as
though such payment had been due but not made at such time.

[REMAINDER OF PAGE INTENTIONALLY BLANK;
SIGNATURE PAGE(s) TO FOLLOW.]

TERM LOAN AND SECURITY AGREEMENT

1

PANACO, INC.,
Borrower

By:_______________________________
Bob G. Alexander,
President

MID RIVER LLC,
as Administrative Agent and Lender

By:_______________________________
Name:_________________________
Its:__________________________

SIGNATURE PAGE TO
TERM LOAN AND SECURITY AGREEMENT

2

EXHIBIT A

FORM OF TERM LOAN NOTE

__________, ___

FOR VALUE RECEIVED, the undersigned ("BORROWER"), hereby promise to pay to
the order of ______________________ ("LENDER"), at the offices of MID RIVER LLC,
a Delaware limited liability company, as Administrative Agent for Lender and
others described below, the aggregate Term Loan Principal Debt owed by Borrower
to Lender pursuant to the Loan Documents (together with accrued and unpaid
interest thereon) at such interest rates, on such dates, and in such amounts as
are specified in the Loan Agreement (hereinafter defined).

This note has been executed and delivered under, and is subject to the
terms of, the Term Loan and Security Agreement, dated as of November 16, 2004
(as amended, modified, supplemented, or restated from time to time, the "LOAN
AGREEMENT"), among Borrower, Administrative Agent, and Lender and other lenders
party thereto, and is one of the "Term Loan Notes" referred to therein.
Capitalized terms used herein shall have the meaning assigned to such terms in
the Loan Agreement unless otherwise defined herein. Reference is made to the
Loan Agreement for provisions affecting this note regarding applicable interest
rates, principal and interest payment dates, final maturity, voluntary and
mandatory prepayments, acceleration of maturity, exercise of Rights, payment of
reasonable attorneys' fees, court costs, and other costs of collection, certain
waivers by Borrower and others now or hereafter obligated for payment of any
sums due hereunder and security for the payment hereof. Without limiting the
immediately preceding sentence, reference is made to SECTION 3.8 of the Loan
Agreement for usury savings provisions.

THIS NOTE AND THE OTHER LOAN DOCUMENTS HAVE BEEN ENTERED INTO PURSUANT TO
SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW AND THE SUBSTANTIVE LAWS
OF THE STATE OF NEW YORK, AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES
OF AMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND
INTERPRETATION HEREOF.

PANACO, INC.

By:_____________________________________
Name:________________________________
Title:_______________________________

EXHIBIT B

[Intentionally Left Blank]

EXHIBIT C

FORM OF ASSIGNMENT AND ASSUMPTION

This Assignment and Assumption (the "ASSIGNMENT AND ASSUMPTION") is
dated as of the Effective Date set forth below and is entered into by and
between [Insert name of Assignor] ("ASSIGNOR") and [Insert name of Assignee]
("ASSIGNEE"). Capitalized terms not otherwise defined herein shall have the
meaning assigned to such terms in the Loan Agreement identified below (as
amended, the "LOAN AGREEMENT"), receipt of a copy of which is hereby
acknowledged by Assignee. The Standard Terms and Conditions set forth in ANNEX 1
attached hereto are hereby agreed to and incorporated herein by reference and
made a part of this Assignment and Assumption as if set forth herein in full.

For an agreed consideration, Assignor hereby irrevocably sells and
assigns to Assignee, and Assignee hereby irrevocably purchases and assumes from
Assignor, subject to and in accordance with the Standard Terms and Conditions
and the Loan Agreement, as of the Effective Date inserted by Administrative
Agent as contemplated below (i) all of Assignor's Rights and obligations in its
capacity as a Lender under the Loan Agreement and any other Loan Document to the
extent related to the amount and percentage interest identified below and (ii)
to the extent permitted to be assigned under applicable Law, all claims, suits,
causes of action, and any other Right of Assignor (in its capacity as a Lender)
against any Person, whether known or unknown, arising under or in connection
with the Loan Agreement, any other Loan Document or the transactions governed
thereby, or in any way based on or related to any of the foregoing, including
without limitation contract claims, tort claims, malpractice claims, statutory
claims, and all other claims at Law or in equity related to the Rights and
obligations sold and assigned pursuant to CLAUSE (i) above (the Rights and
obligations sold and assigned pursuant to CLAUSES (i) and (ii) above,
collectively, the "ASSIGNED INTEREST"). Such sale and assignment is without
recourse to Assignor and, except as expressly provided in this Assignment and
Assumption, without representation or warranty by Assignor.

1.    Assignor:                 ______________________________

2.    Assignee:                 ______________________________
[and is an Affiliate/Related Fund of _______
[Identify Lender](1)]

3.    Borrower:                 Panaco, Inc.

4.    Administrative Agent:     Mid River, LLC, as administrative agent under
the Loan Agreement

5.    Loan Agreement:           Term Loan and Security Agreement dated as of
November __, 2004, among Borrower,
Administrative Agent, and the Lenders named
therein
------------
(1)   Select as applicable.

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6.    Assigned Interest:

Aggregate Amount of Term Loan   Amount of Term Loan Principal  Percentage Assigned of Term
Principal Debt for all Lenders*         Debt Assigned*             Loan Principal Debt
-------------------------------  -----------------------------  ---------------------------

$                                $                                         %

7.    Trade Date: ______________(2)

Effective Date:  _____________ ___, 20___

[TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF
RECORDATION OF TRANSFER IN THE REGISTER THEREFORE.]

The terms set forth in this Assignment and Assumption are hereby agreed to:

[INSERT ASSIGNOR'S SIGNATURE BLOCK]

By:_____________________________________
Name:________________________________
Title:_______________________________

[INSERT ASSIGNEE'S SIGNATURE BLOCK]

By:_____________________________________
Name:________________________________
Title:_______________________________

ACCEPTED:

MID RIVER LLC, as Administrative Agent

By:____________________________________
Name:_______________________________
Title:______________________________

-------------------
*     Amount to be adjusted by the counterparties to take into account any
payments or prepayments made between the Trade Date and the Effective
Date.

(2)   To be completed if Assignor and Assignee intend that the minimum
assignment amount is to be determined as of the Trade Date.

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ANNEX 1
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION

1. Representations and Warranties.

1.1 Assignor. Assignor (a) represents and warrants that (i) it is
the legal and beneficial owner of the Assigned Interest, (ii) the Assigned
Interest is free and clear of any lien, encumbrance, or other adverse claim, and
(iii) it has full power and authority, and has taken all action necessary, to
execute and deliver this Assignment and Assumption and to consummate the
transactions contemplated hereby; and (b) assumes no responsibility with respect
to (i) any statements, warranties, or representations made in or in connection
with the Loan Agreement or any other Loan Document, (ii) the execution,
legality, validity, enforceability, genuineness, sufficiency, or value of the
Loan Documents or any Collateral thereunder, (iii) the financial condition of
Borrower, any Loan Party, any of their Subsidiaries or Affiliates, or any other
Person obligated in respect of any Loan Document, or (iv) the performance or
observance by Borrower, any Loan Party, any of their Subsidiaries or Affiliates,
or any other Person of any of their respective obligations under any Loan
Document.

1.2. Assignee. Assignee (a) represents and warrants that (i) it has
full power and authority, and has taken all action necessary, to execute and
deliver this Assignment and Assumption and to consummate the transactions
contemplated hereby and to become a Lender under the Loan Agreement, (ii) from
and after the Effective Date, it shall be bound by the provisions of the Loan
Agreement as a Lender thereunder and, to the extent of the Assigned Interest,
shall have the obligations of a Lender thereunder, (iii) it has received a copy
of the Loan Agreement, together with copies of the most recent Financial
Statements delivered pursuant to Section 8.1 thereof, as applicable, and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into this Assignment and Assumption and to
purchase the Assigned Interest on the basis of which it has made such analysis
and decision independently and without reliance on Administrative Agent or any
other Lender, and (iv) if it is a Lender organized under the Laws of a
jurisdiction outside of the United States, attached to the Assignment and
Assumption is any documentation required to be delivered by it pursuant to the
terms of the Loan Agreement, duly completed and executed by Assignee; and (b)
agrees that (i) it will, independently and without reliance on Administrative
Agent, Assignor, or any other Lender, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Loan Documents, and
(ii) it will perform in accordance with their terms all of the obligations which
by the terms of the Loan Documents are required to be performed by it as a
Lender.

2. Payments. From and after the Effective Date, Administrative Agent shall
make all payments in respect of the Assigned Interest (including payments of
principal, interest, fees, and other amounts) to Assignor for amounts which have
accrued to but excluding the Effective Date and to Assignee for amounts which
have accrued from and after the Effective Date.

3. General Provisions. This Assignment and Assumption shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
successors and assigns. This Assignment and Assumption may be executed in any
number of counterparts, which together shall constitute one instrument. Delivery
of an executed counterpart of a signature page of this Assignment and Assumption
by telecopy shall be effective as delivery of a manually executed counterpart of
this Assignment and Assumption. This Assignment and Assumption shall be governed
by, and construed in accordance with, the Laws of the State of New York.

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EXHIBIT D

FORM OF LETTER IN LIEU

__________________________
__________________________
__________________________

Attn: Division Order Department

Re: Letter in Lieu of Transfer Order

Gentlemen:

PANACO, INC., as Mortgagor, has executed the mortgages and financing
statements described on EXHIBIT A attached hereto (collectively, the "MORTGAGE")
for the benefit of MID RIVER LLC, ("LENDER"), granting a mortgage on and
pledging those certain properties (the "PLEDGED PROPERTIES") described in the
Mortgage to secure certain obligations also described in the Mortgage. Enclosed
is a copy of the Mortgage covering the Pledged Properties.

EXHIBIT B attached hereto lists the properties which are subject to the
Mortgage for which you are accounting to Mortgagor and the decimal interest in
production heretofore paid to Mortgagor with respect to its interest in each
given property.

Pursuant to the assignment of production provision in the Mortgage,
Mortgagor transferred and assigned all of its interests in the Pledged
Properties to Lender. Therefore, Mortgagor hereby authorizes and instructs you
that all future payments attributable to the Pledged Properties, which would
otherwise be paid to Mortgagor, should be made to:

if by wire transfer:

Mid River LLC
For the Account of Panaco, Inc.

___________________________________________
___________________________________________
Account No.________________________________

if by check, check made payable to:

___________________________________________
___________________________________________

until notified in writing by Lender to discontinue such payments. Also,
Mortgagor hereby requests that you change your records to reflect that Lender is
entitled to the proceeds of production attributable to the Pledged Properties.

In consideration of your acceptance of this Letter-in-Lieu of Transfer
Order, Lender and Mortgagor agree as follows:

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1.    Mortgagor has heretofore executed Transfer or Division Orders to you
covering each of the properties referred to in EXHIBIT B attached to this
letter. This letter is being executed by the undersigned in lieu of
execution of separate Transfer or Division Orders. With respect to
proceeds from the sale of oil, gas and other hydrocarbons as to which you
account hereunder, Lender agrees that it will be bound by the terms,
conditions, warranties and covenants of all such Transfer or Division
Orders heretofore executed by Mortgagor now in force, with the same effect
as though it had executed the originals thereof; PROVIDED, HOWEVER, the
aggregate liability of Lender with respect to any warranty,
representation, covenant or indemnification contained therein or in this
letter shall be limited to an amount equal to the amounts disbursed by you
to Lender hereunder.

2.    Mortgagor hereby agrees that you are relieved of any responsibility
in connection with the application of the proceeds paid by you to Lender
as hereinabove specified and payment made by you to Lender shall be
binding and conclusive as between you and Mortgagor.

In the absence of a question about the enclosed schedule, you are
respectfully requested to make disbursement to Lender as instructed herein and
NOT TO SUSPEND OR DELAY any payments by virtue of the assignment of production
from Mortgagor to Lender. Should you require additional documentation prior to
implementing the manner of disbursement requested herein, notwithstanding the
warranties and indemnifications contained hereinabove, please suspend
disbursements to Mortgagor, pending execution of such additional documentation
as you may reasonably require.

In order that we may have a record evidencing your acceptance of this
Letter-in-Lieu of Transfer Order, we request that you execute one copy of this
letter in the space provided below and return the same to Lender in the enclosed
self-addressed envelope.

Very truly yours,

PANACO, INC., a Delaware corporation,
Mortgagor

By:   _____________________________
Name:________________________
Title:_______________________

MID RIVER LLC, Lender

By:   _____________________________
Name:________________________
Title:_______________________

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ACCEPTED this _____ day of ___________, 20___.

_______________________________________, Purchaser of Production

By:   _____________________________
Name:________________________
Title:_______________________

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