PARALLEL PETROLEUM CORP /DE/
EXHIBIT 10.25
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                                                                  Exhibit 10.25







                                 LOAN AGREEMENT



                             DATED JANUARY 25, 2002



                                 by and between



                         PARALLEL PETROLEUM CORPORATION,
                                  as Borrower,




                                       AND



                            FIRST AMERICAN BANK, SSB,
                                    as Lender



<PAGE>



                                TABLE OF CONTENTS

                                                                       Page No.

ARTICLE I.....................................................................1

Definitions...................................................................1
         1.1      Certain Defined Terms.......................................1
         1.2      Other Definitional Provisions...............................8

ARTICLE II....................................................................8

Revolving Loan................................................................8
         2.1      Revolving Commitment........................................8
         2.2      Manner of Borrowing.........................................9
         2.3      Note........................................................9
         2.4      Principal Payments.........................................10
         2.5      Interest Rate; Interest Payments...........................10
         2.6      Capital Adequacy...........................................10
         2.7      Prepayments................................................11
         2.8      Manner and Application of Payments.........................11
         2.9      Rate Elections.............................................12
         2.10     Increased Cost of Eurodollar Portion.......................12
         2.11     Availability...............................................13
         2.12     Funding Losses.............................................13
         2.13     Taxes......................................................14

ARTICLE III..................................................................15

Borrowing Base and Required Prepayments Under Note...........................15
         3.1      Borrowing Base.............................................15
         3.2      Redeterminations of Borrowing Base and Monthly Automatic
                  Borrowing Base Reduction...................................15
         3.3      Standards for Redetermination..............................15
         3.4      Borrowing Base Redetermination Fee.........................15
         3.5      Mandatory Increase in Collateral or Prepayment
                  of Principal of the Note...................................16
         3.6      Monthly Automatic Borrowing Base Reduction and Prepayment
                  of Principal of the Note...................................16
         3.7      Letters of Credit..........................................16

ARTICLE IV...................................................................17

Security and Assignment......................................................17

ARTICLE V....................................................................17

Conditions Precedent.........................................................17
         5.1      Renewal and Extension......................................17
         5.2      All Advances...............................................18



ARTICLE VI...................................................................19

Representations and Warranties...............................................19
         6.1      Existence and Authority....................................19
         6.2      Powers.....................................................19
         6.3      Financial Statements.......................................19


                                       i
<PAGE>

         6.4      Liabilities................................................20
         6.5      Litigation.................................................20
         6.6      Taxes......................................................20
         6.7      Purpose of Loan............................................20
         6.8      Properties; Liens..........................................20
         6.9      Material Agreements........................................21
         6.10     ERISA......................................................21
         6.11     Location of Records........................................21
         6.12     Permits and Franchises, Etc................................21
         6.13     Subsidiaries...............................................21
         6.14     Hazardous Wastes and Substances............................22
         6.15     Public Utility Holding Company Act.........................22
         6.16     Investment Company Act.....................................22
         6.17     General....................................................22

ARTICLE VII..................................................................23

Affirmative Covenants........................................................23
         7.1      Financial Statements and Other Information.................23
         7.2      Taxes......................................................24
         7.3      Discharge of Contractual Obligations.......................24
         7.4      Legal Status...............................................25
         7.5      Maintenance and Evidence of Priority of Bank Liens.........25
         7.6      Insurance..................................................25
         7.7      Reimbursement of Fees and Expenses.........................25
         7.8      Indemnification............................................26
         7.9      Curing of Defects..........................................26
         7.10     Inspection and Visitation..................................26
         7.11     Notices....................................................27
         7.12     Bank Lien on Other Assets..................................27
         7.13     Compliance.................................................27
         7.14     Compliance with Environmental Laws.........................27
         7.15     Use of Proceeds............................................28
         7.16     Deposit Accounts...........................................28
         7.17     Title Curative.............................................28

ARTICLE VIII.................................................................28

Negative Covenants...........................................................28
         8.1      Liens......................................................28
         8.2      Indebtedness...............................................29
         8.3      ERISA Compliance...........................................29
         8.4      Investments................................................30
         8.5      Mergers, Consolidations....................................30
         8.6      Dividends and Distributions................................30
         8.7      Transactions with Affiliates...............................30
         8.8      Accounting Method and Fiscal Year..........................30
         8.9      Nature of Business.........................................31
         8.10     Disposition of Assets......................................31
         8.11     Current Ratio..............................................31
         8.12     Leases.....................................................31
         8.13     Net Worth..................................................31
         8.14     Debt Service Ratio.........................................31
         8.15     Derivatives................................................31
         8.16     Employee Agreements........................................32

ARTICLE IX...................................................................32

Default and Remedies.........................................................32

                                       ii

<PAGE>

         9.1      Events of Default..........................................32
         9.2      Remedies...................................................34

ARTICLE X....................................................................34

Miscellaneous................................................................34
         10.1     Survival of Representations and Warranties.................34
         10.2     Communications.............................................34
         10.3     Non-Waiver.................................................35
         10.4     Strict Compliance..........................................35
         10.5     Cumulative Rights..........................................35
         10.6     GOVERNING LAW..............................................35
         10.7     CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS;
                  JURISDICTION; AND WAIVER OF JURY TRIAL.....................36
         10.8     Usury Savings Clause.......................................36
         10.9     Enforceability.............................................37
         10.10    Binding Effect.............................................37
         10.11    No Third Party Beneficiary.................................37
         10.12    Delegation by Lender.......................................37
         10.13    Setoff.....................................................37
         10.14    Additional Documents.......................................38
         10.15    Counterparts...............................................38
         10.16    Amendments.................................................38
         10.17    Headings...................................................38
         10.18    Conflicts..................................................38
         10.19    Entirety...................................................38
         10.20    Participations.............................................38
         10.21    Notice of Final Agreement..................................39

                       Exhibit 2.2               -        Request for Advance
                       Exhibit 2.4               -        Promissory Note
                       Exhibit 2.9               -        Form of Rate Election
                       Schedule 5.1              -        Closing Documents
                       Schedule 6.5              -        Litigation
                       Schedule 6.9              -        Material Agreements
                       Exhibit 7.1               -        Compliance Certificate



                                       iii

<PAGE>



                                 LOAN AGREEMENT

     THIS LOAN AGREEMENT (this "Agreement") is entered into this 25th day of
January, 2002, by and between PARALLEL PETROLEUM CORPORATION, a Delaware
corporation ("Borrower") and FIRST AMERICAN BANK, SSB, a state savings bank
("Lender").


                                    RECITALS

     A. Borrower and Washington Mutual Bank, FA, successor by merger to Bank
United ("Prior Lender") entered into that certain Loan Agreement dated December
18, 2000 (the "Prior Loan Agreement").

     B. Contemporaneously with the execution hereof, the Prior Lender has
assigned to Lender all of the Prior Lender's interests in and under the Prior
Loan Agreement, the Prior Note (defined below) and all liens and security
interests securing Borrower's obligations to Prior Lender under the Prior Loan
Agreement and the Prior Note.

     C. Borrower has requested that Lender provide Borrower with a reducing
revolving line of credit facility in an amount up to $30,000,000, and Lender is
willing to make such facility available to Borrower, subject to the terms and
conditions contained herein. The parties hereto agree that this Agreement
replaces the Prior Loan Agreement and that this Agreement and the other Loan
Papers executed in connection herewith shall govern the terms of the loans made
hereunder in their entirety and shall control over the Prior Loan Agreement.

                                    AGREEMENT

     NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained and other good and valuable consideration, it is hereby agreed
between the parties as follows:


                                    ARTICLE I
                                   Definitions

     1.1 Certain Defined Terms. For the purposes of this Agreement, the
following terms shall have the respective meanings assigned to them in this
section or in the section or recital referred to below:

     "Adjusted Eurodollar Rate" means, with respect to each particular
Eurodollar Portion and the associated Eurodollar Rate and Reserve Percentage,
the greater of (i) five percent (5.00%), or (ii) the rate per annum calculated
by Lender (rounded upwards, if necessary, to the next higher 1/100th of 1%)
determined on a daily basis pursuant to the following formula:

                                        1

<PAGE>



                           AER      =          ER     +  EM
                                            ---------
                                            1.00 - RP

                           AER      =       Adjusted Eurodollar Rate
                           ER       =       Eurodollar Rate
                           RP       =       Reserve Percentage
                           EM       =       Eurodollar Margin

The Adjusted Eurodollar Rate shall change as the associated Reserve Percentage
changes.

     "Advance" means any disbursement to or on behalf of Borrower under any of
the Loan Papers, including, without limitation, all amounts advanced under the
Prior Note or the Note.

     "Agreement": the preamble.

     "Bank Liens" means Liens in favor of Lender, securing all or any portion of
the Obligation, including, without limitation, Rights in any of the Collateral
created in favor of Lender, whether by mortgage, pledge, hypothecation,
assignment, transfer or other granting or creation of Liens.

     "Base Rate" means, as of any date, the greater of (i) five percent (5.00%),
or (ii) the fluctuating rate of interest per annum published in the Money Rates
section of The Wall Street Journal as the U.S. "prime rate." If the Money Rates
section of The Wall Street Journal contains more than one U.S. "prime rate,"
then the "prime rate" for purposes of this definition shall be the higher of
said rates. If the Money Rates section of The Wall Street Journal does not have
a rate designated by it as its "prime rate," then the "prime rate" shall be
deemed to be the fluctuating rate of interest per annum which is the general
reference rate designated by Lender as its "reference rate," "base rate" or
other similar rate and which is comparable to the "prime rate" as described
above. The Base Rate is used by Lender as a general reference rate of interest,
taking into account such factors as Lender may deem appropriate, it being
understood that it is not necessarily the lowest or best rate actually charged
to any customer and that Lender may make various commercial or other loans at
rates of interest having no relationship to such rate. Each change in the Base
Rate shall become effective without prior notice to Borrower automatically as of
the opening of business on the date of such change in the Base Rate.

     "Base Rate Portion" means that portion of the unpaid principal balance of
the Revolving Loan which is not made up of Eurodollar Portions.

     "Borrower": the preamble.

     "Borrowing Base": Section 3.1.

     "Borrowing Base Redetermination Fee": Section 3.4.



                                        2

<PAGE>

     "Business Day" means a day on which commercial banks are open for business
with the public in the State of Texas. Any Business Day in any way relating to
Eurodollar Portions (such as the day on which a Eurodollar Interest Period
begins or ends) must also be a day on which, in the judgment of Lender,
significant transactions in Dollars are carried out in the London interbank
market.

     "Cash Flow" means Borrower's Net Income for each fiscal quarter of
Borrower, less preferred dividends paid by Borrower during each such fiscal
quarter, plus depreciation, depletion and other non-cash charges of Borrower
during each such fiscal quarter determined on an unconsolidated basis.

     "Claims": Section 7.8.

     "Collateral": Article IV.

     "Current Assets" of any person shall mean, as of any date, the current
assets that would be reflected on an unconsolidated balance sheet of such person
prepared as of such date in conformity with GAAP.

     "Current Liabilities" of any person shall mean, as of any date, the current
liabilities that would be reflected on an unconsolidated balance sheet of such
person prepared as of such date in conformity with GAAP.

     "Current Ratio" means, as of any date, the ratio of Borrower's Current
Assets (including, for purposes of this calculation, unused availability under
the Revolving Commitment) to its Current Liabilities (excluding, for purposes of
this calculation, current maturities of the Note).

     "Debt Service Ratio" means, as of the end of each fiscal quarter of
Borrower, the ratio of Borrower's Cash Flow during such fiscal quarter to the
Total Monthly Automatic Borrowing Base Reductions during such fiscal quarter.

     "Deed of Trust" means one or more mortgages, deeds of trust, assignments of
production and security agreements and financing statements in favor of Lender
encumbering every interest of Borrower in every oil and gas property owned by
Borrower and selected by Lender to be encumbered as security for the Obligation,
including, without limitation, any such property consisting of royalty
interests, overriding royalty interests and/or reversionary rights relating to
either developed or undeveloped leasehold acreage, it being specifically
recognized that if any such interest selected is in a state where a mortgage,
deed of trust, assignment of production and security agreement or financing
statement is, or may be, ineffective, a document appropriate for use in that
state shall be required.

 "Derivatives" means, foreign exchange transactions and commodity, currency
and interest rate swaps, floors, caps, collars, forward sales, options, other
similar transactions and combinations of the foregoing, including without
limitation, Rate Management Transactions.

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



                                        3

<PAGE>


     "ERISA": Section 6.10.

     "Eurodollar Interest Period" means, with respect to each particular
Eurodollar Portion, a period of thirty (30), sixty (60) or ninety (90) days (or
such longer period as may be requested by Borrower and agreed to by Lender in
its sole discretion), as specified in the Rate Election applicable thereto,
beginning on and including the date specified in such Rate Election (which must
be a Business Day), and ending thirty (30), sixty (60) or ninety (90) days (or
the number of days requested by Borrower and agreed to by Lender in its sole
discretion) thereafter, provided that each Eurodollar Interest Period which
would otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (unless such next succeeding Business Day is in the next
calendar month, in which case such Eurodollar Interest Period shall end on the
immediately preceding Business Day). No Eurodollar Interest Period may be
elected for any Eurodollar Portion which would extend past the Revolving
Maturity Date.

     "Eurodollar Margin" means, with respect to each Eurodollar Portion of the
Revolving Loan, two and three-fourths percent (2.75%).

     "Eurodollar Portion" means any portion of the unpaid principal balance of
the Revolving Loan which Borrower designates as such in a Rate Election.

     "Eurodollar Rate" means, with respect to each particular Eurodollar Portion
for any Interest Period therefor, the rate of interest per annum at which
deposits in immediately available and freely transferrable funds in Dollars are
offered to Lender (at approximately 10:00 a.m. Dallas, Texas time three Business
Days prior to the first day of each Interest Period) in the London interbank
market for delivery on the first day of such Interest Period in an amount equal
to or comparable to the principal amount of the Eurodollar Portion to which such
Interest Period relates. Each determination of the Eurodollar Rate by Lender
shall, in the absence of error, be conclusive and binding.

     "Event of Default": Section 9.1.

     "GAAP"  shall mean  those  generally  accepted  accounting  principles  and
practices  that are  recognized  as such by the American  Institute of Certified
Public  Accountants  acting  through its Accounting  Principles  Board or by the
Financial  Accounting  Standards  Board  (or  any  other  appropriate  board  or
committee thereof),  applied on a basis consistent with that of prior periods so
as to properly reflect the financial  condition,  results of operations and cash
flows of a person,  except that any accounting principle or practice required to
be changed  by the said  Accounting  Principles  Board or  Financial  Accounting
Standards  Board (or any other board or committee  thereof) in order to continue
as a generally accepted  accounting  principle or practice may so be changed and
when so changed shall constitute  generally  accepted  accounting  principles in
accordance with the terms hereof.

     "Highest Lawful Rate" means the maximum nonusurious rate of interest (or,
if the context so requires, an amount calculated at such rate) that Lender is
allowed to contract for, charge, take, reserve or receive under applicable law
after taking into account, to the extent required by applicable law, any and all
relevant payments or charges under the Loan Papers.


                                        4

<PAGE>


     "Interest Period" means, with respect to any Eurodollar Portion, the
related Eurodollar Interest Period.

     "Investments": Section 8.4.

     "Lender": the preamble.

     "Lien" means any lien, mortgage, security interest, charge, or encumbrance
of any kind, including, without limitation, the Rights of a vendor, lessor, or
similar party under any conditional sales agreement or other title retention
agreement or lease substantially equivalent thereto, any production payment, and
any other Right of, or arrangement with, any creditor to have his claim
satisfied out of any property or assets, or the proceeds therefrom, prior to the
general creditors of the owner thereof.

     "Loan Papers" means (i) this Agreement, (ii) any and all notes, mortgages,
deeds of trust, security agreements, financing statements, guaranties, and other
agreements, documents, certificates, letters and instruments ever delivered or
executed pursuant to, or in connection with, this Agreement, as any of the same
may hereafter be amended, supplemented or restated (including, without
limitation, the Note and the Deed of Trust), (iii) any and all agreements,
documents and instruments ever delivered or executed pursuant to, or in
connection with, Rate Management Transactions, and (iv) any and all future
renewals and extensions or restatements of, or amendments or supplements to, all
or any part of the foregoing.

     "Margin Regulations" means, as applicable, Regulations G, U and X of the
Board of Governors of the Federal Reserve System, as from time to time in
effect.

     "Material Adverse Change" means any set of circumstances or events that (i)
will or could reasonably be expected to have any adverse effect upon the
validity, performance, or enforceability of any Loan Paper, (ii) is or could
reasonably be expected to be material and adverse to the financial condition or
business operations of Borrower, (iii) will or could reasonably be expected to
impair the ability of Borrower to fulfill its obligations under the terms and
conditions of the Loan Papers, or (iv) will or could reasonably be expected to
cause an Event of Default.

     "Material  Agreement"  of any  person  means any  material  written or oral
agreement,  contract,  commitment,  or  understanding  to which such person is a
party,  by which such person is directly or  indirectly  bound,  or to which any
asset of such person may be subject, which is not cancelable by such person upon
30 days or less notice without  liability for further payment other than nominal
penalty.

     "Mineral Interests" means Rights, estates,  titles, and interests in and to
oil, gas, sulphur, or other mineral (or any combination thereof) leases (and all
extensions, amendments,  ratifications, and subleases thereof or thereunder) and
any mineral  interests,  royalty and overriding  royalty  interests,  production
payment and net profits  interests,  mineral fee interests,  and rights therein,
including, without limitation, any reversionary or carried interests relating to
the foregoing, together with Rights, titles, and interests created by or arising
under

                                        5

<PAGE>




the  terms  of any  unitization,  communitization,  and  pooling  agreements  or
arrangements, and all properties, rights, and interests covered thereby, whether
arising by contract,  by order,  or by operation of law,  which now or hereafter
include all or any part of the foregoing.

     "Monthly Automatic Borrowing Base Reduction": Section 3.6.

     "Net Income" means Borrower's unconsolidated net income, determined in
accordance with GAAP.

     "Net Worth" means, as of any date, an amount equal to Borrower's
unconsolidated stockholders' equity, as determined in accordance with GAAP.

     "Note": Section 2.3(a).

     "Obligation" means all present and future indebtedness, obligations and
liabilities, and all renewals and extensions thereof, or any part thereof, now
or hereafter owed to Lender by Borrower, arising from, by virtue of, or pursuant
to any Loan Paper (including, without limitation, amounts owed to Lender by
Borrower on account of any letters of credit issued by Lender for the account of
Borrower and any and all obligations, contingent or otherwise, whether now
existing or hereafter arising, of Borrower to Lender arising under or in
connection with Rate Management Transactions), or otherwise, together with all
interest accruing thereon and reasonable costs, expenses, and attorneys' fees
incurred in the enforcement or collection thereof, whether such indebtedness,
obligations, and liabilities are direct, indirect, fixed, contingent,
liquidated, unliquidated, joint, several, or joint and several or were, prior to
acquisition thereof by Lender, owed to some other person.

     "Plan" means any plan subject to Title IV of ERISA and maintained by
Borrower, or any such plan to which Borrower is required to contribute on behalf
of its employees.

     "Prior Lender": Recital A.

     "Prior Loan Agreement": Recital A.

     "Prior Note" means that certain promissory note dated December 18, 2000, in
the original principal amount of $30,000,000 executed by Borrower and payable to
the order of Prior Lender.

     "Rate Election" has the meaning given it in Section 2.9.

     "Rate Management Transaction" means any transaction (including an agreement
with respect thereto) now existing or hereafter entered into between Borrower
and Lender, or any affiliate of Lender, which is a rate swap, basis swap,
forward rate transaction, commodity swap, commodity option, equity or equity
index swap, equity or equity index option, bond option, interest rate option,
foreign exchange transaction, cap transaction, floor transaction, collar
transaction, forward transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect


                                        6

<PAGE>




to any of these transaction) or any combination  thereof,  whether linked to one
or more interest rates, foreign currencies,  commodity prices,  equity prices or
other financial measures.

     "Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System, as from time to time in effect.

     "Reserve Percentage" means, on any day with respect to each particular
Eurodollar Portion in a Tranche, the maximum reserve requirement, as determined
by Lender (including without limitation any basic, supplemental, marginal,
emergency or similar reserves), expressed as a decimal and rounded to the next
higher .01 of 1%, which would then apply to Lender under Regulation D or
successor regulations issued from time to time by the Board of Governors of the
Federal Reserve System with respect to "Eurocurrency liabilities" (as such term
is defined in Regulation D) equal in amount to Lender's Eurodollar Portion in
such Tranche, were Lender to have any such "Eurocurrency liabilities". If such
reserve requirement shall change after the date hereof, the Reserve Percentage
shall be automatically increased or decreased, as the case may be, from time to
time as of the effective time of each such change in such reserve requirement.

     "Revolving Commitment": Section 2.1(a).

     "Revolving Loan" means a loan or loans made under the Revolving Commitment
pursuant to Section 2.1(a).

     "Revolving Maturity Date" means January 25, 2006.

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

     "Subsidiary"  means any  corporation or other entity fifty percent (50%) or
more of the  Voting  Shares  of which  is  owned,  directly  or  indirectly,  by
Borrower.

     "Taxes" has the meaning given it in Section 2.13.

     "Total Monthly Automatic Borrowing Base Reductions" means the sum of the
Monthly Automatic Borrowing Base Reductions during each fiscal quarter of
Borrower.

     "Tranche" has the meaning given it in Section 2.9.

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



                                        7

<PAGE>


     1.2 Other Definitional Provisions.

          (a) All terms defined in this Agreement shall have the above described
     meanings when used in any other Loan Paper or in any certificate, report or
     other document made or delivered pursuant to this Agreement, unless same
     shall otherwise expressly require.

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

          (c) Terms not specifically defined herein shall have the meanings
     accorded them under GAAP, customary oil and gas industry practices or the
     Texas Uniform Commercial Code, as appropriate.

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


                                   ARTICLE II
                                 Revolving Loan

     2.1 Revolving Commitment.

          (a)  Subject  to the terms and  conditions  hereof,  during the period
     beginning  on the date hereof and ending on the  Revolving  Maturity  Date,
     Lender agrees to extend to Borrower a revolving  line of credit which shall
     not exceed at any time outstanding the lesser of (i)  $30,000,000,  or (ii)
     the  Borrowing  Base from time to time in effect (such lesser  amount being
     referred to herein as the "Revolving Commitment"). Subject to the foregoing
     limitations and the requirements set forth herein and in the Note, Borrower
     may borrow,  repay,  and reborrow  hereunder during the period beginning on
     the date hereof and ending on the Revolving Maturity Date.  Notwithstanding
     any other provisions of this Agreement,  no Advance shall be required to be
     made hereunder if any Event of Default has occurred and is continuing.

          (b) Borrower may at any time prior to the Revolving Maturity Date upon
     at least one (1) Business Day's notice in writing to Lender reduce (in
     $100,000 integer multiples) or terminate the Revolving Commitment. If the
     Revolving Commitment is reduced, Lender shall thereafter have no obligation
     to make any Advance that would result in the Revolving Loan exceeding the
     Revolving Commitment as so reduced; if the Revolving Commitment is
     terminated, no further Advance shall be made pursuant to this Agreement.
     Notwithstanding anything to the contrary contained herein, (i) once reduced
     or terminated, the Revolving Commitment may not be increased or reinstated
     except upon the mutual written agreement of Borrower and Lender; and (ii)
     Borrower shall not reduce the Revolving Commitment to an amount that is
     less than the outstanding balance of the Revolving Loan on the effective
     date of such reduction.


                                        8

<PAGE>


     2.2 Manner of Borrowing.

          (a) Each request by Borrower to Lender for an Advance shall be in the
     form of Exhibit 2.2 hereto and shall specify the aggregate amount of such
     requested Advance and the requested date of such Advance. Borrower shall
     furnish to Lender each request for Advance not later than 10:00 a.m.
     Midland, Texas time, (i) one (1) Business Day prior to the requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Base Rate Portions, and (ii) three (3) days prior to the requested
     borrowing date (which must be a Business Day) in the case of Advances to be
     made as Eurodollar Portions; provided that, any Advance to be made as a
     Eurodollar Portion shall require, in addition, a Rate Election as set forth
     in Section 2.9. Subject to Section 2.9, each Advance shall be in the
     minimum amount of $50,000 or the unadvanced portion of the Revolving
     Commitment, whichever is less.

          (b) Upon fulfillment of all applicable conditions set forth in Section
     5.2 hereof (and assuming the prior satisfaction of all conditions pursuant
     to Section 5.1 hereof), Lender shall before 2:00 o'clock p.m. (Midland,
     Texas time) on the requested borrowing date, pay or deliver each Advance to
     or upon the order of Borrower at the principal banking office of Lender in
     Midland, Texas in immediately available funds.

     2.3 Note.

          (a) The  Advances  made by Lender  under the  Revolving  Loan shall be
     evidenced by a promissory note (the "Note"), which shall be (i) dated as of
     the date hereof, (ii) in the principal amount of $30,000,000,  and (iii) in
     the form of Exhibit  2.3 hereto  with  blanks  appropriately  completed  in
     conformity  herewith.  Notwithstanding  the principal amount of the Note as
     stated on the face thereof,  the amount of principal  actually owing on the
     Note at any given time shall be the  aggregate of all Advances  theretofore
     made to Borrower under the Revolving  Loan,  less all payments of principal
     theretofore actually received by Lender and applied to the Note.

          (b) It is expressly agreed that the Note is given, to the extent of
     $12,065,589.00, in renewal, extension and rearrangement, but not in
     extinguishment or novation, of the unpaid principal balance of the Prior
     Note.

     2.4 Principal Payments. The principal of the Note shall be due and payable
on the Revolving Maturity Date, unless earlier due in whole or in part pursuant
to the mandatory prepayment requirements of Section 3.5, Section 3.6 or the
other terms hereof.

     2.5 Interest Rate;  Interest Payments.  The unpaid principal balance of the
Note shall bear  interest  from time to time and  interest  on the Note shall be
payable, as follows:

          (a) Borrower agrees to pay interest on the Note calculated on the
     basis of the actual days elapsed in a year consisting of 365 or, if
     appropriate, 366 days with respect to the unpaid principal amount of each
     Base Rate Portion during the term of the Note until maturity (whether by
     acceleration or otherwise), at a varying rate per annum equal to the lesser
     of (i) the Highest Lawful Rate, or (ii) the Base Rate. Subject to the
     provisions of this Agreement and to


                                        9

<PAGE>


     prepayment, the principal of the Note representing Base Rate Portions shall
     be due and payable as  specified  in Section 2.4 hereof and the interest in
     respect of each Base Rate Portion  shall be due and payable  monthly on the
     1st day of each month, commencing March 1, 2002. Past due principal and, to
     the extent permitted by law, past due interest in respect to each Base Rate
     Portion, shall bear interest,  payable on demand, at a rate per annum equal
     to the Highest Lawful Rate.

          (b) Borrower agrees to pay interest calculated on the basis of a year
     consisting of 360 days with respect to the unpaid principal amount of each
     Eurodollar Portion during the term of the Note until maturity (whether by
     acceleration or otherwise), at a varying rate per annum equal to the lesser
     of (i) the Highest Lawful Rate, or (ii) the applicable Adjusted Eurodollar
     Rate during the related Eurodollar Interest Period. Subject to the
     provisions of this Agreement with respect to prepayment, the principal of
     the Note representing Eurodollar Portions shall be payable as specified in
     Section 2.4 hereof and the interest with respect to each Eurodollar Portion
     shall be due and payable on the day which the related Eurodollar Interest
     Period ends. Past due principal and, to the extent permitted by law, past
     due interest in respect to each Eurodollar Portion, shall bear interest,
     payable on demand, at a rate per annum equal to the Highest Lawful Rate.

     2.6 Capital Adequacy.  If at any time after the date hereof,  and from time
to  time,  any law,  rule,  regulation  or  treaty  now  existing  or  hereafter
promulgated regarding capital adequacy, or any adoption thereof, ruling thereon,
change therein, or interpretation  thereof now existing or hereafter made by any
governmental  authority,  central bank or comparable  agency  regarding  capital
adequacy,  or compliance by Lender with any request,  directive,  or requirement
now existing or hereafter imposed by any governmental authority, central bank or
comparable agency regarding capital adequacy (whether or not having the force of
law),  shall  result in Lender  incurring a  reduction  in the rate of return on
Lender's capital as a consequence of Lender's  obligations  hereunder to a level
below that which Lender  otherwise  could have  achieved in an amount  deemed by
Lender to be material (and Lender may, in determining such amount,  utilize such
assumptions  and  allocations  of  costs  and  expenses  as  Lender  shall  deem
reasonable and may use any reasonable  averaging or attribution  method),  then,
Lender  may,  from time to time,  notify  Borrower  and  deliver  to  Borrower a
certificate  setting forth in reasonable  detail the  calculation  of the amount
necessary  to  compensate  Lender for the  reductions  incurred.  In such event,
Borrower  agrees that it shall,  within  thirty  (30) days,  either (i) pay such
amount to Lender,  or (ii)  renegotiate  the interest rate on the Note to a rate
mutually  acceptable to Borrower and Lender.  Failing Borrower's payment of such
amount  pursuant to clause (i) above or the  renegotiation  of the interest rate
pursuant to clause (ii) above, Borrower agrees that it shall, within ninety (90)
days thereafter, pay the Obligation in full and terminate this Agreement.

     2.7 Prepayments. Borrower may prepay any Base Rate Portion, in whole or in
part, without penalty or premium, provided, however, that the Revolving
Commitment shall be terminated if the unpaid principal balance of the Note is at
any time reduced to less than $1,000. No prepayment of any Eurodollar Portion or
any part thereof shall be permitted prior to the last day of the current
Interest Period therefor without the prior consent of Lender; provided, that if
Lender determines that it may not lawfully maintain a Eurodollar Portion to



                                       10

<PAGE>


the last day of the current Interest Period therefor, Borrower shall prepay such
Eurodollar  Portion  on the date  required  by Lender.  If there is a  permitted
prepayment  of any  Eurodollar  Portion  prior to the  last  day of the  current
Interest Period therefor, whether by consent or requirement of Lender (including
without limitation  pursuant to Section 3.5 or Section 3.6 hereof) or because of
acceleration  or  otherwise,  Borrower  shall,  within  fifteen (15) days of any
request by Lender,  pay to Lender any loss or expense  which Lender may incur or
sustain as a result of any such prepayment. A statement as to the amount of such
loss or expense,  prepared in good faith and in reasonable  detail by Lender and
submitted by Lender to Borrower, shall be conclusive and binding absent manifest
error in  computation.  Calculation of all amounts  payable to Lender under this
Section  2.7  shall be made as  though  Lender  shall  have  actually  funded or
committed to fund the  relevant  Eurodollar  Portion  through the purchase of an
underlying deposit in an amount equal to the amount of such portion and having a
maturity  comparable to the current Interest Period for such Eurodollar Portion;
provided,  however, that Lender may fund any Eurodollar Portion in any manner it
sees fit and the foregoing  assumption shall be utilized only for the purpose of
calculation of amounts payable under this Section 2.7.

     2.8 Manner and  Application  of Payments.  All  payments of  principal  and
interest  on the Note shall be made by Borrower  to Lender  before 1:30  o'clock
p.m. (Midland,  Texas time), in lawful money of the United States of America and
in immediately  available funds at Lender's principal banking office in Midland,
Texas.  In any case where a payment of principal or interest on the Note, or any
commitment or other fee, is due on a day other than a Business Day, the maturity
thereof  shall be extended to the next  succeeding  Business  Day,  but interest
shall  continue to accrue  until the payment is in fact made.  All  payments and
prepayments  on the  Obligation,  including  proceeds  from the  exercise of any
Rights  under the Loan  Papers or proceeds  of any of the  Collateral,  shall be
applied to the Obligation in the order deemed  appropriate by Lender, but Lender
shall  always  retain the right to apply  same in the  following  order:  (i) to
expenses for which Lender shall not have been  reimbursed  under the Loan Papers
and then to all  indemnified  amounts  due  Lender  under  the terms of the Loan
Papers;  (ii) to accrued  and unpaid  interest  on the Note;  (iii) to Base Rate
Portions of the Loan;  (iv) to Eurodollar  Portions of the Loan;  and (v) to the
remaining  Obligation.  Subject to the  foregoing,  payments of principal of the
Note shall be applied to the  Eurodollar  Portions  as  Borrower  shall  select;
provided,  however,  that Borrower shall select Eurodollar Portions to be repaid
subject to the terms of Section 2.7 hereof, and in a manner designed to minimize
the  consequential  loss to Lender,  if any,  resulting from such payments;  and
provided further that, if Borrower shall fail to select the Eurodollar  Portions
to which such payments are to be applied, or if an Event of Default has occurred
and is continuing at the time of such payment,  then Lender shall be entitled to
apply the  payment  to such  Eurodollar  Portions  in the  manner it shall  deem
appropriate.

     2.9 Rate Elections. Borrower may from time to time designate all or any
portions of the Revolving Loan (including any yet to be made Advances which are
to be made prior to or at the beginning of the designated Interest Period but
excluding any portions of the Revolving Loan which are required to be repaid
prior to the end of the designated Interest Period) as a "Tranche", which term
refers to a set of Eurodollar Portions with identical Interest Periods. Lender
shall not be required to give effect to such election during the continuance of
an Event

                                       11

<PAGE>


of  Default,  and  Borrower  may make such an election  with  respect to already
existing  Eurodollar Portions only if such election will take effect at or after
the  termination of the Interest  Period  applicable  thereto.  Each election by
Borrower of a Tranche shall:

          (a) Be made in writing in the form and substance of Exhibit 2.9
     attached hereto, duly completed, herein called a "Rate Election";

          (b) Specify the aggregate amount of the Revolving Loan which Borrower
     desires to designate as such Tranche, the first day of the Interest Period
     which is to apply thereto, and the length of such Interest Period; and

          (c) Be received by Lender not later than 10:00 a.m. Midland, Texas
     time, on the third Business Day preceding the first day of the specified
     Interest Period.

     Each Rate Election shall be irrevocable. Borrower may make no Rate Election
which does not specify an  Interest  Period  complying  with the  definition  of
"Eurodollar  Interest  Period" in Section 1.1, and the  aggregate  amount of the
Tranche  elected in any Rate Election  must be  $1,000,000 or a higher  integral
multiple of $100,000.  Upon the  termination of each Interest Period the portion
of the Revolving Loan within the related Tranche shall,  unless the subject of a
new Rate Election then taking  effect,  automatically  become a part of the Base
Rate Portion of the Revolving  Loan and become  subject to all provisions of the
Loan Papers  governing such Base Rate Portion.  Borrower shall have no more than
two (2) Tranches in effect at any time.

     2.10 Increased Cost of Eurodollar Portion. If any applicable domestic or
foreign law, treaty, rule, directive or regulation (whether now in effect or
hereinafter enacted or promulgated, including Regulation D) or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof (whether or not having the
force of law):

          (a) shall change the basis of taxation of payments to Lender of any
     principal, interest, or other amounts attributable to any Eurodollar
     Portion of the Revolving Loan, or otherwise due under this Agreement in
     respect of any Eurodollar Portion of the Revolving Loan (other than taxes
     imposed on the overall net income of Lender or any lending office of Lender
     by any jurisdiction in which Lender or any such lending office is located);

          (b) shall change, impose, modify, apply or deem applicable any
     reserve, special deposit or similar requirements in respect of any
     Eurodollar Portion (excluding those for which Lender is fully compensated
     pursuant to adjustments made in the definition of Adjusted Eurodollar Rate)
     or against assets of, deposits with or for the account of, or credit
     extended by, Lender; or

          (c) shall  impose on Lender or the London  interbank  market any other
     condition affecting any Eurodollar Portion;

and the result of any of the foregoing (a) through (c) is to (1) increase the
cost to Lender of funding or maintaining any Eurodollar Portion, or (2) to
reduce the amount of any sum


                                       12

<PAGE>


receivable  by  Lender  in  respect  of  any  Eurodollar  Portion  by an  amount
reasonably  deemed by Lender to be  material;  then (i)  Lender  shall  promptly
notify  Borrower in writing of the happening of such event,  (ii) Borrower shall
thereafter upon demand pay to Lender such  additional  amount or amounts as will
compensate  Lender  for  such  additional  cost  or  reduction,  subject  to the
provisions of Section 2.12,  and (iii)  Borrower may elect,  by giving to Lender
not less than three (3) Business Days' notice, to convert all (but not less than
all) of any  such  Eurodollar  Portion  into a part of the  Base  Rate  Portion,
subject to the provisions of Section 2.12.

     2.11 Availability. If (a) any change in applicable laws, treaties, rules or
regulations  or  in  the   interpretation  or  administration   thereof  in  any
jurisdiction  whatsoever,  domestic  or  foreign,  shall  make  it  unlawful  or
impracticable  for  Lender to fund or  maintain  Eurodollar  Portions,  or shall
materially  restrict  the  authority  of Lender  to  purchase  or take  offshore
deposits  of  dollars  (i.e.,  "eurodollars"),  or (b)  Lender  determines  that
matching deposits appropriate to fund or maintain any Eurodollar Portion are not
available to it, or (c) Lender  determines  that the formula for calculating the
Adjusted Eurodollar Rate does not fairly reflect the cost to Lender of making or
maintaining  loans based on such rate,  then, upon notice by Lender to Borrower,
Borrower's right to elect  Eurodollar  Portions shall be suspended to the extent
and for  the  duration  of such  illegality,  impracticability,  restriction  or
condition,  and all  Eurodollar  Portions (or portions  thereof)  which are then
outstanding  or are then the  subject  of any Rate  Election  and  which  cannot
lawfully or  practicably  be  maintained or funded shall  immediately  become or
remain part of the Base Rate Portions of the Loan,  subject to the provisions of
Section 2.12.  Borrower agrees to indemnify  Lender and hold it harmless against
all costs, expenses, claims, penalties, liabilities and damages which may result
from any  such  change  in law,  treaty,  rule,  regulation,  interpretation  or
administration.

     2.12 Funding Losses. In addition to its other obligations hereunder,
Borrower will indemnify Lender against, and reimburse Lender on demand for, any
loss or expense incurred or sustained by Lender, as a result of (a) any payment
or prepayment (whether authorized or required hereunder or otherwise) of all or
a portion of a Eurodollar Portion on a day other than the day on which the
applicable Interest Period ends, (b) any payment or prepayment (whether required
hereunder or otherwise) of the Revolving Loan made after the delivery, but
before the effective date, of a Rate Election, if such payment or prepayment
prevents such Rate Election from becoming fully effective, (c) the failure of
any Advance to be made or of any Rate Election to become effective due to any
condition precedent to an Advance not being satisfied, due to the inability of
Lender (acting reasonably and in accordance with Section 2.11) to determine the
Adjusted Eurodollar Rate for a Eurodollar Portion, or due to any other action or
inaction of Borrower, or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Eurodollar Portion into a
Base Rate Portion on a day other than the day on which the applicable Interest
Period ends.

     2.13 Taxes. All payments by Borrower of principal of, and interest on, the
Revolving Loan, and all other amounts payable hereunder shall be made free and
clear of and without deduction for any present or future income, excise, stamp
or franchise taxes and other taxes, fees, duties, withholdings or other charges
of any nature whatsoever imposed by any taxing authority, but excluding
franchise taxes and taxes imposed on or measured by Lender's net


                                       13

<PAGE>


income or receipts (such non-excluded items being called "Taxes").  In the event
that any  withholding  or  deduction  from any  payment  to be made by  Borrower
hereunder is required in respect of any Taxes  pursuant to any  applicable  law,
rule or regulation, then, Borrower will:

          (a) pay directly to the relevant authority the full amount required to
     be so withheld or deducted;

          (b) promptly forward to Lender an official receipt or other
     documentation satisfactory to Lender evidencing such payment to such
     authority; and

          (c) pay to Lender such additional amount(s) as is necessary to ensure
     that the net amount actually received by Lender will equal the full amount
     such Lender would have received had no such withholding or deduction been
     required.

If any Taxes are directly asserted against Lender with respect to any payment
received by Lender hereunder, Lender may pay such Taxes and Borrower will
promptly pay such additional amounts to Lender (including any penalties,
interest or expenses) as is necessary in order that the net amount received by
such person after the payment of such Taxes (including any taxes on such
additional amount) shall equal the amount such person would have received had no
such Taxes been asserted. If Borrower fails to pay any Taxes when due to the
appropriate taxing authority or fail to remit to Lender the required receipts or
other required documentary evidence, Borrower shall indemnify Lender for any
Taxes, interest or penalties that may become payable by Lender as a result of
any such failure.


                                   ARTICLE III
               Borrowing Base and Required Prepayments Under Note

     3.1 Borrowing  Base.  The  "Borrowing  Base" is initially set at the sum of
$13,000,000.00  but shall be subject to  redetermination  as further provided in
this Article.

     3.2 Redeterminations of Borrowing Base and Monthly Automatic Borrowing Base
Reduction. Lender shall redetermine the Borrowing Base and Monthly Automatic
Borrowing Base Reduction semi-annually, on or about May 1 and November 1 of each
year, beginning May 1, 2002. Lender may require a redetermination of the
Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time in its
sole discretion. In addition, Borrower may request that Lender redetermine the
Borrowing Base and Monthly Automatic Borrowing Base Reduction at any time, and
Lender agrees to respond to each such request within thirty (30) days after
Lender has received from Borrower the requisite information for such
redetermination; provided, however, that Borrower may request no more than one
Borrowing Base and Monthly Automatic Borrowing Base Reduction redetermination
during the six-month period between each scheduled Borrowing Base
redetermination. Promptly following each redetermination of the Borrowing Base
or the Monthly Automatic Borrowing Base Reduction, Lender shall notify Borrower
of any change in the amount of the Borrowing Base or the Monthly Automatic
Borrowing Base Reduction. Until such time as Lender has notified Borrower in
writing of a change in the amount of the Borrowing Base or the Monthly Automatic
Borrowing Base


                                       14

<PAGE>


Reduction,  the Borrowing  Base and Monthly  Automatic  Borrowing Base Reduction
will remain unchanged.

     Borrower  shall furnish to Lender,  no later than thirty (30) days prior to
each redetermination date hereunder (or within thirty (30) days after receipt of
notice from Lender that it has elected to make a  non-scheduled  Borrowing  Base
and  Monthly   Automatic   Borrowing  Base  Reduction   redetermination),   such
information as Lender may request,  in form and substance  acceptable to Lender,
requisite  to  Lender's  redetermination  of  the  Borrowing  Base  and  Monthly
Automatic Borrowing Base Reduction.

     3.3 Standards for Redetermination. All Borrowing Base and Monthly Automatic
Borrowing Base Reduction redeterminations shall be made by Lender in the
exercise of its sole discretion in accordance with its customary practices and
standards for loans in similar amounts to borrowers similarly situated, at the
time and under the circumstances then prevailing.

     3.4 Borrowing Base Redetermination Fee. In addition to the payments
provided for in the Note, Borrower shall pay to Lender at the time Lender
provides the notice required by Section 3.2, an amount equal to one-quarter of
one percent (.25%) of the amount of any increase in the Borrowing Base upon a
scheduled or non-scheduled Borrowing Base redetermination. The parties
acknowledge and agree that the Borrowing Base redetermination fees payable
hereunder are intended as reasonable compensation to Lender for its efforts in
redetermining the Borrowing Base during the term of the Revolving Commitment and
for no other purpose.

     3.5 Mandatory Increase in Collateral or Prepayment of Principal of the
Note. In the event that the Obligation shall, at the time of notification of the
Borrowing Base by Lender to Borrower pursuant to Section 3.2, be in excess of
the Revolving Commitment, Borrower shall, at Borrower's option, either (i)
within thirty (30) days thereafter, by instruments satisfactory in form and
substance to Lender, provide Lender with additional collateral with value in
amounts satisfactory to Lender, in its sole discretion, in order to increase the
Borrowing Base by an amount at least equal to such excess, (ii) within thirty
(30) days thereafter, prepay the principal of the Note (together with accrued
interest on the principal amount so prepaid) in an amount at least equal to such
excess, or (iii) within thirty (30) days thereafter, eliminate the Borrowing
Base deficiency through a combination of items (i) and (ii) above.

     3.6 Monthly Automatic Borrowing Base Reduction and Prepayment of Principal
of the Note. The Borrowing Base shall automatically reduce by $300,000 on May 1,
2002, and on the first day of each month thereafter during the term of the
Revolving Commitment (each a "Monthly Automatic Borrowing Base Reduction"),
subject to Lender's right, in its sole discretion, to redetermine the Monthly
Automatic Borrowing Base Reduction in conjunction with a Borrowing Base
redetermination pursuant to Section 3.2 above. In the event that the Obligation
shall be in excess of the Revolving Commitment on the date of any Monthly
Automatic Borrowing Base Reduction, then on said date Borrower shall prepay the
principal of the Note in an amount equal to such excess, in addition to the
payment of accrued interest on the Note that may be due on such date. The
provisions of Section 3.5 above shall be applicable



                                       15

<PAGE>

to scheduled and non-scheduled  redeterminations of the Borrowing Base but shall
not apply to a Monthly Automatic Borrowing Base Reduction.

     3.7 Letters of Credit. Unless an Event of Default shall have occurred and
be continuing or outstanding Advances to Borrower exceed the Borrowing Base,
Lender shall (subject to the exceptions hereinafter provided) from time to time
during the term of the Revolving Commitment upon request of Borrower issue
letters of credit for the account of Borrower in such face amounts as Borrower
may designate; provided, however, that: (a) the face amount of all such letters
of credit in the aggregate issued and outstanding during the term of this
Agreement shall not exceed the sum of $500,000; (b) the face amount of all such
letters of credit outstanding and requested shall be considered as Advances
hereunder for Borrowing Base purposes; (c) no such letter of credit shall be for
a term longer than one year, nor shall any such letter of credit have an
expiration date subsequent to the Revolving Maturity Date; (d) payments by
Lender on any such letter of credit shall be considered as Advances made as Base
Rate Portions under the Note; (e) the Collateral shall secure all of the
obligations of Borrower to repay Lender in connection with any amounts paid by
Lender on drafts or demands for payment drawn or made under any such letters of
credit (or under or in connection with any related letter of credit
applications); (f) each such letter of credit shall be used only for the purpose
of securing Borrower's bonding obligations associated with its oil and gas
business; and (g) simultaneously with the issuance of any such letter of credit,
Borrower shall pay to Lender a letter of credit fee in an amount equal to the
greater of $500, or one percent (1%) of the face amount of such letter of credit
(calculated on a per annum basis based on the stated term of such letter of
credit).

                                   ARTICLE IV
                             Security and Assignment

     To secure full and complete payment and performance of the Obligation,
Borrower hereby grants and conveys to and creates in favor of Lender Bank Liens
in, to and on all of the following items and types of property (referred to
collectively herein as the "Collateral"), all as more particularly described in
the Loan Papers:

          (a) all present and future interest now owned or hereafter acquired by
     Borrower in the Mineral Interests identified in the Deed of Trust, together
     with all proceeds of production therefrom;

          (b) all present and future increases, profits, combinations,
     reclassifications, improvements and products of, accessions, attachments,
     and other additions to, tools, parts and equipment used in connection with,
     and substitutes and replacements for, any of the Collateral;

          (c) all cash and noncash proceeds and other Rights arising from or by
     virtue of, or from the voluntary or involuntary sale, lease or other
     disposition of, or collections with respect to, or insurance proceeds
     payable with respect to, or proceeds payable by virtue of warranty or other
     claims against manufacturers of, or claims against any other person with
     respect to, any of the Collateral;

                                       16

<PAGE>



          (d) all present and future  security  for the payment to Borrower  for
     any of the Collateral;

          (e) all goods which gave or will give rise to any of the Collateral or
     are evidenced, identified or represented therein or thereby; and

          (f) all certificates of title, manufacturer's statements of origin, or
     other documents, accounts and chattel paper arising from or related to any
     of the Collateral.

     All Bank Liens created in favor of Prior Lender pursuant to the Prior Loan
Agreement are hereby ratified, renewed and extended in favor of Lender, without
lapse or interruption of perfection or priority.


                                    ARTICLE V
                              Conditions Precedent

     5.1 Renewal and Extension. The obligation of Lender to accept the Note in
renewal, extension and rearrangement of the Prior Note shall be subject to
satisfaction of each of the following conditions precedent:

          (a) There shall have been executed, where appropriate, and delivered
     by Borrower (and/or any other requisite party thereto) (i) the documents
     listed on Schedule 5.1 hereto, all of which shall be in form and substance
     satisfactory to Lender and its counsel, and (ii) such other documents or
     instruments as Lender may reasonably require.

          (b) All requirements of notice necessary to perfect each Bank Lien
     shall have been accomplished or arrangements made therefor to the
     satisfaction of Lender and its counsel.

          (c) Lender shall have received from Borrower's legal counsel a
     favorable legal opinion in form and substance satisfactory to Lender and
     its counsel respecting the matters set forth in Section 6.1, 6.2, 6.5, 6.15
     and 6.16 hereof.

          (d) No Material Adverse Change shall have occurred in the financial
     condition, assets or business prospects of Borrower since September 30,
     2001.

          (e) All fees due and payable to Prior Lender and all accrued and
     unpaid interest on the Prior Note shall have been paid up to the date
     hereof.

          (f) Lender shall have received an assignment of notes, liens and
     security interests and the original of the Prior Note, with appropriate
     endorsement, from the Prior Lender, all in form and substance satisfactory
     to Lender.

               (g) Lender shall have received from Borrower satisfactory title
          information covering not less than eighty percent (80%) of the
          engineered value of Borrower's Mineral Interests.

                                       17

<PAGE>


               (h)  Borrower  shall  have paid to Lender a  facility  fee in the
          amount of $32,500.

               (i) Lender shall have received from Borrower a satisfactory
          environmental report covering Borrower's Mineral Interests prepared by
          an independent firm acceptable to Lender or other environmental
          assurances acceptable to Lender.

               (j) Lender shall have received from Borrower's litigation counsel
          a satisfactory report with respect to each litigation matter set forth
          on Schedule 6.5 attached hereto.

               (k) Lender shall have received from Borrower a statement
          satisfactory to Lender regarding Borrower's commodity hedging
          strategy.

     5.2 All Advances.  The  obligation of Lender to make any Advance  hereunder
shall be subject to satisfaction of each of the following conditions precedent:

          (a) An authorized individual shall have requested such Advance in
     accordance with the requirements of Section 2.2(a) hereof.

          (b) No Event of Default shall have occurred that has not been waived
     in writing by Lender, and there shall exist no condition or event that,
     with the giving of notice or lapse of time or both, would constitute an
     Event of Default.

          (c) Borrower shall have observed, performed and complied with all
     covenants, agreements, duties and obligations contained in the Loan Papers.


                                   ARTICLE VI
                         Representations and Warranties

     In order to induce Lender to enter into this Agreement, Borrower represents
and warrants to Lender as of the date hereof, which representations and
warranties shall survive the delivery of the Note, as follows:

     6.1 Existence and Authority.  Borrower is (i) a corporation duly organized,
legally  existing and in good standing  under the laws of the State of Delaware,
and (ii) duly  qualified as a foreign  corporation  and in good  standing in the
State of Texas. Except to the extent that the failure to qualify would not cause
or  result  in  a  Material  Adverse  Change,  there  are  no  other  states  or
jurisdictions  wherein  Borrower's   operations,   transaction  of  business  or
ownership of property makes such qualification necessary.

     6.2 Powers. Borrower is duly authorized and empowered to create and issue
the Note and to execute and deliver this Agreement, the other Loan Papers and
all other instruments referred to or mentioned herein, and all action (corporate
or otherwise) on Borrower's part requisite for the due creation, issuance and
delivery of the Note and the due

                                       18

<PAGE>

execution and delivery of this Agreement and the other Loan Papers has been duly
and  effectively  taken.  This Agreement is, and the other Loan Papers when duly
executed and delivered will be, legal, valid and binding obligations of Borrower
enforceable   in  accordance   with  their  terms  (subject  to  any  applicable
bankruptcy,  insolvency or other laws  generally  affecting the  enforcement  of
creditors' rights).  The Loan Papers do not violate any provisions of Borrower's
articles of  incorporation  or bylaws or of any contract,  partnership  or other
agreement,  law or regulation to which Borrower is subject,  and the same do not
require the consent or approval of any other person or entity, including without
limitation,  any regulatory authority or governmental body of the United States,
of any state or of any  political  subdivision  of the  United  States or of any
State.

     6.3 Financial Statements. The unconsolidated financial statements of
Borrower for the three (3) months ended September 30, 2001, which have been
delivered to Lender, are complete and correct, have been prepared in conformity
with GAAP, and fairly present the financial condition and results of operations
of Borrower as of the dates and for the periods stated. No Material Adverse
Change in the financial condition of Borrower has occurred since September 30,
2001.

     6.4 Liabilities. As of the date hereof, Borrower has no material
liabilities, direct or contingent, other than those set forth in the financial
statements of Borrower referred to in Section 6.3 hereof. Borrower knows of no
fact, circumstance, act, condition or development that will or could cause a
Material Adverse Change.

     6.5 Litigation. Except as provided in Schedule 6.5 attached hereto,
Borrower is not involved in, nor is aware of the threat of, any material
litigation, nor are there any outstanding or unpaid judgments against Borrower.

     6.6 Taxes. All tax returns required to be filed by Borrower in all
jurisdictions have been filed, and all taxes, assessments, fees and other
governmental charges upon Borrower or upon any of its property, income or
franchises, which are due and payable, have been paid, or adequate reserves
determined in conformity with GAAP have been provided for payment thereof.

     6.7 Purpose of Loan.  The proceeds of any Advances (a) are not and will not
be used directly or indirectly for the purpose of purchasing or carrying, or for
the  purpose of  extending  credit to others for the  purpose of  purchasing  or
carrying,  any  "margin  stock" as that term is defined in  Regulation  U of the
Board of Governors of the Federal  Reserve System,  as amended;  and (b) will be
otherwise used for lawful purposes.

     6.8 Properties; Liens.

          (a) With regard to the Mineral Interests included in the Deed of
     Trust, (i) Borrower has good and marketable title to all such Mineral
     Interests, free and clear of all Liens except Liens permitted under Section
     8.1 hereof, and has full authority to create Bank Liens thereon; and (ii)
     all such Mineral Interests are valid, subsisting and in full force and
     effect, and

                                       19

<PAGE>


all rentals, royalties and other amounts due and payable in respect thereof have
been duly paid.

          (b) Borrower has good and marketable title to all of its other
     respective properties reflected on the financial statements referred to in
     Section 6.3 hereof, and, except for the Liens permitted under Section 8.1,
     there is no Lien on any asset of Borrower.

          (c) Subject to the Liens permitted under Section 8.1 and Liens that
     neither materially detract from the marketability of the property nor
     impair the use of the property, and except as may be limited or otherwise
     affected by bankruptcy, insolvency, reorganization or similar laws
     affecting creditors' rights generally, upon execution, delivery and
     recording, or filing, as appropriate, the Loan Papers will be effective to
     create in favor of Lender a legal, valid and continuing first Lien on the
     property (real and personal, tangible and intangible) described therein,
     prior and superior to all other existing or future Liens, and, upon the
     filing of the appropriate notice documents, will be enforceable as such
     against creditors and purchasers from Borrower, and no other filings,
     recordings or other actions are necessary or desirable in order to
     establish, preserve, protect and perfect such Lien in favor of Lender as a
     valid and perfected first Lien on such property, except a continuation
     statement may be required under the Uniform Commercial Code.

          (d) None of the Collateral is or will be subject to a gas balancing
     arrangement under which a material imbalance exists with respect to which
     imbalance Borrower is in an overproduced status and is required to (i)
     permit one or more third parties to take a portion of the production
     attributable to such Collateral without payment (or without full payment)
     therefor, and/or (ii) make payment in cash in order to correct such
     imbalance.

     6.9  Material  Agreements.   Except  for  the  Loan  Papers,  the  Material
Agreements described on Schedule 6.9 attached hereto, agreements,  documents and
instruments giving rise to Mineral Interests,  farmout agreements, gas contracts
and operating and joint operating  agreements  related to any Mineral Interests,
there are no Material Agreements of Borrower.  The performance by Borrower under
any Material  Agreement will not cause a Material  Adverse  Change.  Borrower is
not, nor will the execution, delivery and performance of and compliance with the
terms of the Loan Papers cause Borrower to be, in default (nor has any potential
default  occurred)  under any Material  Agreement,  any  agreement,  document or
instrument giving rise to Mineral Interests,  farmout agreements,  gas contracts
or any  operating  or joint  operating,  or  unitization  agreements  related to
Mineral  Interests,  other than in each case such defaults or potential defaults
which could not, individually or collectively,  cause a Material Adverse Change.
A default by Borrower under any operating or joint operating  agreement  related
to any Mineral  Interests it owns will not result in any loss or  diminution  of
any other Mineral Interests it owns.

     6.10 ERISA. All Plans maintained by Borrower are in compliance with all
funding and other requirements of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and none have been terminated or have accrued any
funding deficiency for which Borrower would be liable under said statute.



                                       20

<PAGE>


     6.11 Location of Records. The records of Borrower concerning the Collateral
are kept at the following  location:  110 North Marienfeld,  Suite 465, Midland,
Texas 79701.

     6.12 Permits and Franchises, Etc. Borrower has all rights, licenses,
permits, franchises, patents, patent rights, trademarks, trademark rights and
copyrights that are required in order for it to conduct its business as now
conducted without known conflict with the rights of others. Borrower is not
aware of any fact or condition that might cause any of such rights not to be
renewed in due course.

     6.13 Subsidiaries. Borrower presently has no Subsidiary. Borrower owns no
stock or other ownership interest in any other corporation, limited liability
company or association, except Borrower owns a 30.675% membership interest in
First Permian, L.L.C., a Delaware limited liability company. Borrower is not a
member of any general or limited partnership, joint venture or association of
any type whatsoever except associations, joint ventures or other relationships
(a) that are established pursuant to a standard form operating agreement or
similar agreement or that are partnerships for purposes of federal income
taxation only, (b) that are not corporations or partnerships (or subject to the
Uniform Partnership Act) under applicable state law, and (c) whose businesses
are limited to the exploration, development and operation of oil, gas or mineral
properties and interests owned directly by the parties in such associations,
joint ventures or relationships.

     6.14 Hazardous  Wastes and  Substances.  Borrower and its properties are in
compliance with applicable state and federal  environmental laws and regulations
and Borrower is not aware of and has not received any notice of any violation of
any applicable state or federal  environmental  law or regulation and, except as
previously  disclosed in writing to Lender,  there has not heretofore been filed
any complaint, nor commenced any administrative  procedure,  against Borrower or
any of its  predecessors,  alleging  a  violation  of any  environmental  law or
regulation.  Except in substantial  compliance with relevant environmental laws,
Borrower has not installed, used, generated, stored or disposed of any hazardous
waste, toxic substance,  asbestos or related material ("Hazardous Materials") on
its properties.  For the purposes of this Agreement,  Hazardous  Materials shall
include,  but  shall  not  be  limited  to,  substances  defined  as  "hazardous
substances" or "toxic  substances" in the Comprehensive  Environmental  Response
Compensation and Liability Act of 1980, as amended,  42 U.S.C.ss.9061,  et seq.,
Hazardous  Materials  Transportation  Act, 49  U.S.C.ss.1802,  et seq.,  and the
Resource  Conservation  and  Recovery  Act,  42  U.S.C.ss.6901,  et seq.,  or as
"hazardous  substances,"  "hazardous waste" or "pollutant or contaminant" in any
other applicable federal, state or local environmental law or regulation.  There
do not exist upon any property owned by Borrower any  underground  storage tanks
or facilities,  and to the knowledge of Borrower, none of such property has ever
been used for the treatment,  storage,  recycling,  or disposal of any Hazardous
Materials.

     6.15 Public Utility Holding Company Act. Borrower is not a "holding
company," or "subsidiary company" of a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company" or a
"public utility" within the meaning of the Public Utility Holding Company Act of
1935, as amended.



                                       21

<PAGE>


     6.16 Investment Company Act. Borrower is not an "investment  company," or a
company  "controlled"  by an  "investment  company"  within  the  meaning of the
Investment Company Act of 1940, as amended.

     6.17 General. There are no significant material facts or conditions
relating to the Loan Papers, any of the Collateral, or the financial condition
or business of Borrower that could, collectively or individually, cause a
Material Adverse Change and that have not been related, in writing, to Lender as
an attachment to this Agreement; and all writings heretofore or hereafter
exhibited or delivered to Lender by or on behalf of Borrower are and will be
genuine and in all respects what they purport and appear to be.



                                   ARTICLE VII
                              Affirmative Covenants

     As an inducement to Lender to enter into this Agreement, Borrower covenants
and agrees that, from the date hereof and until termination of this Agreement
and payment in full of the Obligation (except as otherwise provided in this
Article), unless otherwise agreed to by Lender in writing:

     7.1 Financial Statements and Other Information. Borrower will promptly
furnish to Lender copies of (i) such information regarding its business and
affairs and financial condition as Lender may reasonably request, and (ii)
without request, the following:

          (a) as soon as  available  and in any event  within  ninety  (90) days
     after  the end of each  fiscal  year of  Borrower,  a  consolidated  and an
     unconsolidated  balance  sheet of  Borrower  as of the close of such fiscal
     year and the related consolidated and unconsolidated  statements of income,
     cash flows and stockholders'  equity of Borrower for such year, which shall
     be audited and  accompanied by the  unqualified  opinion and report thereon
     issued by Borrower's independent public accountants;

          (b) as soon as available and in any event within forty-five (45) days
     after the end of each fiscal quarter of Borrower, an unaudited consolidated
     and unconsolidated balance sheet of Borrower as of the close of such fiscal
     quarter and the related unaudited consolidated and unconsolidated
     statements of income, cash flows and stockholders' equity of Borrower for
     such fiscal quarter;

          (c) as soon as available and in any event within forty-five (45) days
     after the end of each fiscal quarter of Borrower, a report summarizing
     production, gross revenues, expenses, and net revenues from all of
     Borrower's Mineral Interests for such quarter on a field by field basis
     and, if requested by Lender, on a lease by lease basis;

          (d) on or before March 31 and September 30 of each year, an oil and
     gas reserve evaluation effective as of the immediately preceding December
     31 and June 30, respectively, covering all of Borrower's Mineral Interests
     under the defined categories of proved


                                       22

<PAGE>


     developed producing, proved developed nonproducing, and proved undeveloped,
     prepared by  independent  petroleum  engineers  selected  by  Borrower  and
     satisfactory to Lender;

          (e) within forty-five (45) days after the end of each fiscal quarter
     of Borrower, the Compliance Certificate in the form of Exhibit 7.1 hereto
     signed by the President or Chief Financial Officer of Borrower;

          (f) as soon as  available,  copies of all filings by Borrower with the
     Securities and Exchange Commission;

          (g) immediately upon becoming aware of the existence of, or any
     material change in the status of, any litigation which could create a
     Material Adverse Change if determined adversely against Borrower, a written
     communication to Lender of such matter;

          (h) immediately upon becoming aware of an Event of Default or the
     existence of any condition or event that constitutes, or with notice or
     lapse of time, or both, would constitute an Event of Default, a verbal
     notification to Lender specifying the nature and period of existence
     thereof and what action Borrower is taking or proposes to take with respect
     thereto and, immediately thereafter, a written confirmation to Lender of
     such matters;

          (i)  immediately  upon becoming aware that any person has given notice
     or taken any other  action  with  respect  to a claimed  default  under any
     material  indenture,   mortgage,  deed  of  trust,  promissory  note,  loan
     agreement,  note agreement,  drilling contract,  operating or joint venture
     agreement or any other Material  Agreement or undertaking to which Borrower
     is a party, a verbal  notification to Lender specifying the notice given or
     action taken by such person and the nature of the claimed  default and what
     action  Borrower is taking or proposes to take with  respect  thereto  and,
     immediately thereafter,  a written communication to Lender of such matters;
     and

          (j) immediately upon becoming aware of the commencement of any
     material action or material proceeding against Borrower or any of its
     properties by any governmental agency, including, without limitation, the
     Internal Revenue Service, the Environmental Protection Agency, the U.S.
     Department of Energy or the Federal Energy Regulatory Commission, a written
     communication to Lender of such matter.

All financial statements, schedules and other financial information delivered
hereunder shall be prepared in conformity with GAAP and shall be certified as
true and correct by the President or Chief Financial Officer of Borrower by
signature and date thereon.

     7.2 Taxes. Borrower will pay and discharge or cause to be paid and
discharged all taxes, assessments and governmental charges or levies imposed
upon it or upon its income and profits or upon any of its property, real,
personal or mixed, or upon any part thereof, before the same shall become in
default, as well as all lawful claims for labor, materials and supplies or
otherwise, which, if not paid, might become a Lien upon such properties or any
part thereof; provided that Borrower shall not be required to pay and discharge
or cause to be paid or discharged any such tax, assessment, charge, levy or
claim contested by it in good faith by



                                       23

<PAGE>


appropriate  proceedings  if  Borrower  shall  have  set  up  adequate  reserves
therefor, if required,  under GAAP; and provided,  further, that the immediately
preceding  provision shall not apply to any Lien imposed by the U.S.  Government
for failure to pay income,  payroll,  FICA or similar  taxes,  and payment  with
respect to any such tax, assessment,  charge, levy or claim shall be made before
any property of Borrower shall be seized and sold in satisfaction thereof.

     7.3 Discharge of Contractual Obligations. Borrower will do and perform
every act and discharge all of the obligations provided to be performed and
discharged under the Loan Papers, and any and all of the instruments or
documents referred to or mentioned herein at the time or times and in the manner
required.

     7.4 Legal Status. Borrower will do or cause to be done all things necessary
to preserve, renew and keep in full force and effect its existence, rights,
licenses, permits and franchises and comply with all laws and regulations
applicable to it, and, further, comply with all applicable laws and regulations,
whether now in effect or hereafter enacted or promulgated by any governmental
authority having jurisdiction over any of its assets or properties,
noncompliance with which would cause a Material Adverse Change.

     7.5  Maintenance  and  Evidence of Priority of Bank Liens.  Borrower  shall
perform such acts and duly authorize, execute,  acknowledge,  deliver, file, and
record (or cause to be filed and recorded) such additional assignments, security
agreements,   deeds  of  trust,  mortgages  and  other  agreements,   documents,
instruments  and  certificates  as  Lender  may  reasonably  deem  necessary  or
appropriate  in order to perfect and  maintain  the Bank Liens and  preserve and
protect the Rights of Lender in respect of all  present  and future  Collateral,
and cause to be  furnished  to Lender  such  opinions  of  counsel as Lender may
request  regarding the priority of Borrower's title to, and the Bank Liens upon,
the assets of Borrower, all of which opinions shall be prepared by such law firm
or firms as may be acceptable to Lender.

     7.6 Insurance. Borrower presently maintains and will continue to maintain
such policies of liability, hazard, damage, business interruption and workmen's
compensation insurance as are customarily carried by companies similarly
situated. If requested by Lender, any such policies of insurance shall show
Lender therein as loss payee. Upon request by Lender, Borrower will furnish
Lender with certificates and policies necessary to give Lender reasonable
assurance of the existence of such coverage. Borrower agrees to notify promptly
Lender of any termination or other material change in Borrower's insurance
coverage, and to provide Lender, upon request, with all information about the
renewal of each policy at least 15 days prior to the expiration thereof.

     7.7 Reimbursement of Fees and Expenses. Borrower agrees to pay, on demand,
all reasonable out-of-pocket fees and expenses incurred by Lender or its
designated representatives in connection with the negotiation, preparation and
execution of this Agreement, all renewals hereof, the other Loan Papers or other
transactions pursuant hereto or to the Loan Papers, as well as all costs of
filing and recordation, all legal and accounting fees, costs associated with
Borrowing Base redeterminations as provided in Section 3.4, all inspection,
environmental audit and similar costs related to the evaluation of the
Collateral, all costs associated with enforcing any of Lender's Rights under the
Loan Papers (including,

                                       24

<PAGE>



without limitation, costs of repossessing, storing, transporting, preserving and
insuring any of the  Collateral),  all court costs  associated with enforcing or
defending any Rights against Borrower or any third party challenging said Rights
and  any  other  cost  or  expense   incurred   by  Lender  or  its   designated
representatives in connection  herewith or with the other Loan Papers,  together
with  interest  at the  Highest  Lawful  Rate  per  annum  on each  such  amount
commencing  10 days  after  the  date  notice  of such  expenditure  is given to
Borrower by Lender until the date it is repaid to Lender.

     7.8  Indemnification.  Borrower agrees to indemnify  Lender,  its officers,
directors, shareholders,  employees, and affiliates (collectively "Indemnitee"),
from and against any and all liabilities,  obligations, claims, losses, damages,
penalties,  actions,  judgments,  suits,  remedial actions,  costs,  expenses or
disbursements (collectively, "Claims") of any kind or nature whatsoever that may
be imposed on,  incurred by, or asserted  against  Indemnitee  growing out of or
resulting from (i) the Loan Papers and the  transactions  and events at any time
associated therewith (including, without limitation, the enforcement of the Loan
Papers and the defense of Indemnitee's  actions and inactions in connection with
the Loan),  except to the limited extent such Claims are  proximately  caused by
Indemnitee's  gross negligence or willful  misconduct;  (ii) the presence of any
Hazardous  Materials on or under the properties covered by the Deed of Trust; or
(iii) any activity carried on or undertaken on or off the properties  covered by
the Deed of Trust,  whether  prior to or during the term  hereof and  whether by
Borrower or by any third person,  in  connection  with the  treatment,  storage,
recycling,  removal,  handling or disposal of  Hazardous  Materials  at any time
located  on or under the  properties  covered  by the Deed of Trust.  Indemnitee
shall  have the  right  to  defend  any such  Claims,  employing  its  attorneys
therefor.  While Borrower shall also be entitled to employ its own attorneys and
to  participate  in the defense of any such  Claims,  Indemnitee  shall,  if not
furnished with reasonable indemnity, have the right to compromise and adjust all
such Claims.  The covenants and conditions of this section shall at all times be
construed to be personal covenants in favor of Indemnitee and shall not run with
the lands; provided,  however, that such covenants and indemnity shall remain in
full force and effect  notwithstanding the payment in full of the Obligation and
the release,  either  partially or wholly,  of the Bank Liens or any foreclosure
thereunder.  All such Claims as may be paid by Indemnitee shall bear interest at
the Highest  Lawful  Rate per annum until paid by Borrower  and shall be part of
the  Obligation  secured by the Bank Liens.  THE PARTIES  HERETO  INTEND FOR THE
PROVISIONS OF THIS PARAGRAPH TO APPLY TO AND PROTECT EACH INDEMNIFIED PARTY FROM
THE CONSEQUENCES OF STRICT LIABILITY  IMPOSED OR THREATENED TO BE IMPOSED ON ANY
INDEMNIFIED PARTY AS WELL AS FROM THE CONSEQUENCES OF ITS OWN NEGLIGENCE (EXCEPT
GROSS NEGLIGENCE),  WHETHER OR NOT THAT NEGLIGENCE IS THE SOLE,  CONTRIBUTING OR
CONCURRING CAUSE OF ANY CLAIMS INDEMNIFIED AGAINST IN THIS PARAGRAPH.

     7.9 Curing of Defects. Borrower will promptly cure any material defects in
the execution and delivery of any of the Loan Papers, and in any other
instrument or document referred to or mentioned herein. Borrower will
immediately execute and deliver to Lender, upon request, all such other and
further instruments as may be reasonably required or desired by Lender from time
to time in compliance with or accomplishment of the covenants and agreements of
Borrower made in the Loan Papers.


                                       25

<PAGE>


     7.10 Inspection and Visitation. Borrower will grant Lender access to all of
its books and records, as well as to all of the Collateral, and allow inspection
and copying of same by Lender or its designated representatives at any time
during normal business hours or such other time as Lender may reasonably
request.

     7.11 Notices. Borrower will give prompt written notice to Lender of any
proceedings instituted against it by or in any federal or state court or before
any commission or other regulatory body, federal, state or local, which, if
adversely determined, would cause a Material Adverse Change.

     7.12 Bank Lien on Other  Assets.  If  requested by Lender,  Borrower  shall
execute and deliver to Lender one or more mortgages, deeds of trust, assignments
of production, security agreements,  financing statements, pledge agreements, or
other  security  documents in favor of Lender  covering  every interest in every
asset or property  (including,  without limitation,  Mineral Interests) owned by
Borrower,  whether now owned or hereafter  acquired,  which shall become part of
the Collateral.  Borrower agrees to regularly monitor  engineering data covering
all producing Mineral Interests owned by Borrower and to pledge such of the same
to  Lender in  substantially  the form of the Deed of Trust to the  extent  that
Lender shall at all times be secured by perfected  liens and security  interests
covering  not less than  eighty  percent  (80%) of the  engineered  value of all
producing  Mineral  Interests  of  Borrower  as  reflected  in the  most  recent
engineering  report  furnished by Borrower to Lender  pursuant to Section 7.1(d)
above.

     7.13 Compliance. Borrower will observe and comply with:

          (a) all laws, statutes, codes, acts, ordinances, rules, regulations,
     directions and requirements of all federal, state, county, municipal and
     other governments, departments, commissions, boards, courts, authorities,
     officials and officers, domestic and foreign, where the failure to observe
     or comply would cause a Material Adverse Change; and

          (b) all orders, judgments, decrees, injunctions, certificates,
     franchises, permits, licenses and authorizations of all federal, state,
     county, municipal and other governments, departments, commissions, boards,
     courts, authorities, officials and officers, domestic and foreign, where
     the failure to observe or comply would cause a Material Adverse Change and
     against which it shall maintain such reserves as are appropriate under
     GAAP.

     7.14 Compliance with Environmental Laws. The Borrower is and will remain in
substantial compliance with all state and federal environmental laws and
regulations and Borrower will not place nor permit to be placed any Hazardous
Materials on any of its properties in violation of applicable state and federal
environmental laws. In the event Borrower should discover any Hazardous
Materials on any of its properties which could result in a breach of the
foregoing covenant, Borrower shall notify Lender within three (3) days after
such discovery. Borrower shall dispose of all material amounts of Hazardous
Materials generated by the Borrower only at facilities and/or with carriers that
maintain valid governmental permits under the Resource Conservation and Recovery
Act, 42 U.S.C. ss.6901. In the event of any notice or filing of any complaint or
commencement of any administrative hearing or procedure against the Borrower
alleging a violation of any environmental law or

                                       26

<PAGE>


regulation,  Borrower  shall give  notice to Lender  within  five (5) days after
Borrower has received notice of such notice or filing.

     7.15 Use of Proceeds. Borrower will use the proceeds of the Revolving Loan
for refinancing the Prior Note, financing oil and gas acquisitions or capital
expenditures, or working capital in Borrower's oil and gas business.

     7.16 Deposit  Accounts.  Borrower agrees to maintain all of its significant
operating demand deposit accounts with Lender.

     7.17 Title Curative.  As soon as practicable but in any event within ninety
(90) days after receipt by Borrower from Lender or its counsel of written notice
of material  title  defects  affecting  the  Collateral  that Lender  reasonably
requires to be cured,  Borrower  shall use its best efforts to provide  curative
information  with  respect  to  such  title  defects,   in  form  and  substance
satisfactory to Lender.


                                  ARTICLE VIII
                               Negative Covenants

     As an inducement to Lender to enter into this Agreement, Borrower hereby
covenants and agrees that, from the date hereof and until termination of this
Agreement and payment in full of the Obligation (except as otherwise provided in
this Article), unless otherwise agreed to by Lender in writing:

     8.1 Liens. Borrower will not create, assume or suffer to exist any Lien
upon any of its properties or assets now owned or hereafter acquired securing
any indebtedness other than the Obligation or acquire or agree to acquire any
property under any conditional sale agreement or other title retention
agreement, excluding, however, from the operation of this section:

          (a) deposits or pledges to secure payments of workmen's  compensation,
     unemployment insurance, old age pensions or other social security;

          (b) deposits or pledges to secure performance of bids, tenders,
     contracts (other than contracts for the payment of money), leases, public
     or statutory obligations, surety or appeal bonds, or other deposits or
     pledges for purposes of like general nature in the ordinary course of
     business;

          (c) Liens for taxes, assessments or other governmental charges or
     levies that are not delinquent or that are in good faith being contested or
     litigated, if such reserve as shall be required by GAAP shall have been
     made therefor, provided, that this exception shall not allow any Lien
     imposed by the U.S. Government for failure to pay income, payroll, FICA or
     similar taxes;

          (d) mechanics', carriers', workmen's, repairman's or other like Liens
     arising in the ordinary course of business securing obligations less than
     ninety (90) days from the date

                                       27

<PAGE>


     of invoice,  and on which no suit to foreclose has been filed, or which are
     in good faith being  contested  or  litigated,  if such reserve as shall be
     required by GAAP shall have been made therefor;

          (e) Liens created by or resulting from any litigation or legal
     proceeding that is currently being contested in good faith by appropriate
     proceedings, if such reserve as shall be required by GAAP shall have been
     made therefor;

          (f) Liens,  charges and encumbrances  incidental to the conduct of its
     business  or the  ownership  of its  properties  or assets,  which were not
     incurred in  connection  with the  borrowing  of money or the  obtaining of
     advances  or credit and that do not  materially  detract  from the value of
     such  property  or assets  or  materially  impair  the use  thereof  in the
     operation of its business;

          (g) landlords'  Liens for rental not yet due and payable and which, to
     the extent the same encumbers any of the Collateral, are subordinate to the
     Bank Liens;

          (h) Liens arising in the normal course of business under operating
     agreements covering oil and gas properties and interests therein, including
     such Liens as may arise thereunder because of the default of other parties
     to the operating agreement; or

          (i) the Bank Liens.

     8.2 Indebtedness. Borrower will not create, assume, incur or have
outstanding, or in any manner become or be liable directly or indirectly
(whether by way of guaranty or otherwise) in respect of, any indebtedness for
borrowed money or the purchase price of any property (including direct, indirect
and capitalized leases), excluding, however, from the operation of this section:

          (a) the Note;

          (b) accounts payable for services furnished and for the purchase price
     of materials and supplies acquired in the ordinary course of its business,
     not more than ninety (90) days from the date of invoice;

          (c)  indebtedness of Borrower in respect of any Derivatives  permitted
     by Section 8.15; and

          (d) other  indebtedness  not to exceed an aggregate amount of $100,000
     at any time outstanding.

     8.3 ERISA Compliance. Borrower will not at any time permit any Plan subject
to ERISA maintained by it to (i) engage in any "prohibited transaction" as such
term is defined in Section 4975 of the Internal Revenue Code of 1986, as
amended; (ii) incur any "accumulated funding deficiency" as such term is defined
in Section 302 of ERISA; or (iii) terminate in a manner

                                       28

<PAGE>

which  could  result in the  imposition  of a lien on its  property  pursuant to
Section 4068 of ERISA.

     8.4 Investments. Borrower will not make or commit to make, any advance,
loan, extension of credit or capital contribution to, or purchase of any stock,
bonds, notes, debentures or other securities of, or make any other investment in
any person, or accept any item in satisfaction of indebtedness (all of the
aforesaid transactions being herein called "Investments"), except:

          (a) Investments in accounts, contract rights and chattel paper (as
     defined in the Uniform Commercial Code), and notes receivable, arising or
     acquired in the ordinary course of business;

          (b) Investments with maturities of not more than 180 days in direct
     obligations of the United States of America, or obligations, the principal
     and interest of which are unconditionally guaranteed by the United States
     of America;

          (c) certificates of deposit maintained with Lender;

          (d) Borrower's existing Investment in First Permian, L.L.C.; and

          (e) other  Investments  not to exceed  $50,000 in the aggregate at any
     time outstanding.

     8.5 Mergers, Consolidations. Borrower will not (i) amend or otherwise
modify its corporate charter or otherwise change its structure in any manner
that would cause a Material Adverse Change; (ii) form any new subsidiary
company; or (iii) consolidate with or merge into, or acquire any party or permit
any party to consolidate with or merge into, or acquire it.

     8.6 Dividends and Distributions. Neither Borrower nor any Subsidiary will
declare, pay or make any loans, advances, dividends or distributions, of any
kind, to its stockholders or other equity owners, or make any other distribution
on account of, or purchase, acquire or redeem or retire any stock or other
security issued by it, except that Borrower may pay cash dividends on its
outstanding shares of 6% Convertible Preferred Stock in accordance with the
provisions of Borrower's Certificate of Designations, Preferences and Rights of
Serial Preferred Stock - 6% Convertible Preferred Stock dated October 19, 1998,
provided that no Event of Default exists at the time of declaration or payment
of such dividends and the payment of such dividends would not cause an Event of
Default.

     8.7 Transactions with Affiliates. Borrower will not, directly or
indirectly, enter into any transaction (including, but not limited to, the sale
or exchange of property or the rendering of services) with any of its
affiliates, other than in the ordinary course of business and upon fair and
reasonable terms no less favorable than Borrower could obtain or could become
entitled to in an arm's length transaction with a person that was not an
affiliate.


                                       29

<PAGE>


     8.8 Accounting Method and Fiscal Year. Borrower will not make any change in
its present  accounting  method unless such changes are required for  conformity
with GAAP.

     8.9 Nature of Business.  Borrower will not make any  substantial  change in
the nature of its businesses as now conducted.

     8.10 Disposition of Assets. Borrower will not sell, transfer, lease,
exchange, alienate or otherwise dispose of any of its property or assets except,
to the extent not otherwise forbidden under the Deed of Trust:

          (a)  equipment  that is  worthless or obsolete or which is replaced by
     equipment of equal suitability and value;

          (b)  inventory  that is  sold  in the  ordinary  course  of  business,
     including, without limitation, as-extracted collateral; and

          (c) interests in oil and gas leases, or portions thereof, so long as
     no well situated on any such lease or located on any unit containing all or
     any part thereof, is capable (or is subject to being made capable through
     commercially feasible operations) of producing oil, gas or other
     hydrocarbons or minerals in commercial quantities.

     8.11 Current Ratio. At all times during the term hereof, Borrower's Current
Ratio shall not be less than 1.00 to 1.00.

     8.12 Leases. Borrower shall not pay or become liable to pay rentals or
lease payments on any lease (excluding oil and gas leases), sublease or similar
arrangement in an amount exceeding $250,000 in the aggregate in any fiscal year.

     8.13 Net Worth. At all times during the term hereof, Borrower's Net Worth
shall not be less than (a) $30,000,000, plus (b) seventy-five percent (75%) of
the net proceeds of any equity offering by the Borrower on or after the date of
this Agreement, plus (c) fifty percent (50%) of Borrower's Adjusted Net Income
for each fiscal quarter, if positive, and zero percent (0%) if negative,
determined on a cumulative basis, for the period beginning October 1, 2001, and
ending on the last day of the most recent fiscal quarter as of the time in
question. As used in this Section 8.13, Borrower's Adjusted Net Income means for
any period, Borrower's Net Income for such period, provided there shall be
excluded from such Net Income (to the extent otherwise included therein) the
cumulative effect of a change in accounting principles and the after-tax net
effect of any non-recurring non-cash charges, including, without limitation, any
charges under Financial Accounting Standard Board Statement No. 121, as amended,
supplemented or modified from time to time.

     8.14 Debt Service Ratio. At all times during the term hereof, Borrower's
Debt Service Ratio shall not be less than 1.10 to 1.00.

     8.15 Derivatives. Borrower shall not enter into any Derivatives, other than
oil and/or gas price Derivatives which are related to bona fide hedging
activities and as to which (i) the

                                       30
<PAGE>

aggregate notional amounts of such Derivatives during any calculation period do
not exceed seventy-five percent (75%) of Borrower's estimated production from
proved producing reserves existing as of the date of the execution thereof based
upon the then most current reserve evaluation required pursuant to Section
7.1(d) above, (ii) such Derivatives do not contain terms or provisions which
could require margin calls, (iii) the counterparty to any such Derivatives have
a minimum rating of "A-" by Standard  Poors' Corporation or "A3" by Moody's
Investors Service, Inc., (iv) such Derivatives are for a term of eighteen (18)
months or less, and (v) such Derivatives have the economic effect of assuring
the receipt by Borrower of a price equal to or greater than that under Lender's
then current pricing policy.

     8.16 Employee Agreements. Borrower will not amend or modify the Incentive
Award Agreements or Change of Control Agreements described on Schedule 6.9
attached hereto (the "Employee Agreements") and will not enter into any
additional agreements of a similar nature with any person. Notwithstanding the
other provisions of this Agreement, Borrower shall have the right to make
payments pursuant to the terms of the Employee Agreements, provided that no
Event of Default exists at the time of any such payments and such payments would
not cause an Event of Default under this Agreement.


                                   ARTICLE IX
                              Default and Remedies

     9.1 Events of Default. If any one or more of the following shall occur and
shall not have been remedied in the period, if any, provided, an "Event of
Default" shall be deemed to have occurred hereunder and with respect to all of
the Obligation, unless waived in writing by Lender:

          (a) default shall occur in the payment when due of the Obligation or
     any part thereof including, without limitation, any principal or interest
     due on the Note or any commitment or other fee due hereunder;

          (b) any representation, warranty or statement made by Borrower herein,
     in any of the other Loan Papers or in any certificate furnished to Lender
     hereunder shall be breached or shall prove to be untrue or misleading in
     any material respect at the time when made;

          (c) default shall occur in the performance or observance of any
     covenant, agreement, duty or obligation of Borrower contained herein or in
     any of the other Loan Papers; provided, that breach of the covenant
     contained in Section 8.11, Section 8.13 or Section 8.14 hereof shall not
     constitute an Event of Default unless the same shall continue for a period
     of thirty (30) days;

          (d) Borrower shall (i) apply for or consent to the appointment of a
     receiver, trustee or liquidator of it or of all or a substantial part of
     its assets; (ii) be unable, or admit in writing its inability, to pay its
     debts as they become due; (iii) make a general assignment for the benefit
     of creditors; (iv) be adjudicated a bankrupt or insolvent or file a
     voluntary petition in

                                       31

<PAGE>



     bankruptcy; (v) file a petition or an answer seeking reorganization or an
     arrangement with creditors or to take advantage of any bankruptcy or
     insolvency law; (vi) file an answer admitting the material allegations of,
     or consent to, or default in answering, a petition filed against it in any
     bankruptcy, reorganization or insolvency proceedings; or (vii) take any
     action (corporate or otherwise) for the purpose of effecting any of the
     foregoing;

          (e) an order, judgment or decree shall be entered by any court of
     competent jurisdiction approving a petition seeking reorganization of
     Borrower or appointing a receiver, trustee or liquidator of Borrower or of
     all or a substantial part of its assets, and such order, judgment or decree
     shall continue unstayed in effect for any period of thirty (30) consecutive
     days;

          (f) any Lien for failure to pay income, payroll, FICA or similar taxes
     shall  be  filed by the U.S.  Government  or any  agent or  instrumentality
     thereof against Borrower or any of its assets;

          (g) there shall occur any acceleration, notice of default, filing of
     suit or notice of breach by any other party to any Material Agreement to
     which Borrower is a party wherein the amount involved or claimed exceeds
     $100,000, following the passage of any grace period provided for
     thereunder;

          (h) default shall occur in the payment of any indebtedness of Borrower
     aggregating $100,000 or more under any note, loan agreement or credit
     agreement and such default shall continue for more than the period of
     grace, if any, specified therein, or any such indebtedness shall become due
     before its stated maturity by acceleration of the maturity thereof or shall
     become due by its terms and shall not be promptly paid or extended;

          (i) any final judgment or judgments for the payment of money in the
     amount of $100,000 or more, in the aggregate, shall be rendered against
     Borrower and shall not be satisfied or discharged at least thirty (30) days
     prior to the date on which any of its assets could be lawfully sold to
     satisfy such judgment or judgments;

          (j) the good faith belief by Lender that the prospect of payment or
     performance of the Obligation is materially impaired, or that the value of
     the Collateral has, or will be, materially decreased;

          (k) a Material Adverse Change has occurred with respect to Borrower;

          (l) a majority of the individuals comprising the current Board of
     Directors of Borrower shall resign, be declared incompetent or otherwise be
     removed (voluntarily or involuntarily) or cease to serve as members of the
     Board of Directors of Borrower; or

          (m) the occurrence or existence of any default, event of default or
     other similar condition or event (however described) with respect to any
     Rate Management Transaction.


                                       32

<PAGE>


     9.2 Remedies. Upon the occurrence of any Event of Default, Lender shall
have no further obligation to advance funds hereunder or under the Note, and
Lender may declare the principal of, and all interest then accrued on, the Note
and all other parts of the Obligation to be immediately due and payable,
whereupon the same shall forthwith become due and payable without further
presentment, demand, protest, notice of acceleration or the intent to
accelerate, or other notice of any kind, all of which Borrower hereby expressly
waives, anything contained herein, in the Note or in any of the other Loan
Papers to the contrary notwithstanding; provided that any default under
subsections (d) or (e) of Section 9.1 shall result in the principal of, and all
interest then accrued on, the Note and all other parts of the Obligation
becoming immediately due and payable in full without the necessity of any act by
Lender. Further, Lender may, in its discretion, but shall not be required to,
exercise such Rights as are provided it in any of the Loan Papers or at law or
in equity. Nothing contained in this Article shall be construed to limit or
amend in any way the Events of Default enumerated in the Loan Papers or any
other document executed in connection with the transactions contemplated herein.
Further, in such event, Lender shall have all other Rights afforded to it with
respect to Borrower or any of the Collateral under any of the Loan Papers or
under any applicable law or in equity.


                                    ARTICLE X
                                  Miscellaneous

     10.1 Survival of Representations and Warranties. All representations and
warranties of Borrower herein, and all covenants, agreements, duties and
obligations of Borrower herein not fully performed on or before the date of this
Agreement, shall survive such date.

     10.2 Communications. Unless specifically provided otherwise, whenever any
Loan Paper requires or permits any consent, approval, notice, request, or demand
from one party to another, such communication must be in writing to be effective
and shall be deemed to have been given on the day actually delivered or, if
mailed, on the third day (or if such third day is not a Business Day, then on
the next succeeding Business Day) after it is enclosed in an envelope, addressed
to the party to be notified at the address stated below, properly stamped,
sealed, and deposited in the appropriate official postal service. Until changed
by notice pursuant hereto, the address for each party for purposes hereof is as
follows:

                  BORROWER:         PARALLEL PETROLEUM CORPORATION
                                    110 North Marienfeld, Suite 465
                                    Midland, Texas  79701


                  LENDER:           FIRST AMERICAN BANK, SSB
                                    1004 N. Big Spring, Suite 121
                                    Midland County
                                    Midland, Texas 79701
                                    Attention:  Frank K. Stowers

                                       33

<PAGE>


     10.3 Non-Waiver.

          (a) The acceptance by Lender at any time and from time to time of part
     payment on the Obligation shall not operate as a waiver of any Event of
     Default then existing.

          (b) No waiver by Lender of any Event of Default shall operate as a
     waiver of any other then existing or subsequent Event of Default.

          (c) No delay or omission by Lender in exercising any Right shall
     impair such Right or operate as a waiver thereof, 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 Papers or
     otherwise.

          (d) No notice or demand given by Lender in any case shall operate as a
     waiver of Lender's right to take other action in the same, similar or other
     instances without such notice or demand.

          (e) No Advance hereunder shall operate as a waiver by Lender of (i)
     the representations, warranties and covenants of Borrower under the Loan
     Papers; (ii) any Event of Default; or (iii) any of the conditions to
     Lender's obligation, if any, to make further Advances.

     10.4 Strict Compliance. If any action or failure to act by Borrower
violates any covenant of Borrower contained herein or in any other Loan Paper,
then such violation shall not be excused by the fact that such action or failure
to act would otherwise be permitted by any covenant (or exception to any
covenant) other than the covenant violated.

     10.5 Cumulative Rights. The Rights of Lender under the Loan Papers are in
addition to all other Rights provided by law, whether or not the Obligation is
due and payable and whether or not Lender has instituted any suit for collection
or other action in connection with the Loan Papers.

     10.6 GOVERNING LAW. THIS AGREEMENT HAS BEEN PREPARED, IS BEING EXECUTED AND
DELIVERED,  AND  IS  INTENDED  TO BE  PERFORMED,  IN THE  STATE  OF  TEXAS.  THE
SUBSTANTIVE  LAWS OF SUCH STATE AND THE  APPLICABLE  FEDERAL  LAWS OF THE UNITED
STATES OF AMERICA  SHALL  GOVERN THE  VALIDITY,  CONSTRUCTION,  ENFORCEMENT  AND
INTERPRETATION  OF THIS  AGREEMENT AND THE OTHER LOAN PAPERS,  WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW, PROVIDED,  HOWEVER,  THAT THE RIGHTS PROVIDED IN
THE LOAN PAPERS WITH  REFERENCE  TO  PROPERTIES  SITUATED IN OTHER STATES MAY BE
GOVERNED BY THE LAWS OF SUCH OTHER STATES.

     10.7 CHOICE OF FORUM; CONSENT TO SERVICE OF PROCESS; JURISDICTION; AND
WAIVER OF JURY TRIAL. ANY SUIT, ACTION OR PROCEEDING AGAINST BORROWER ARISING
OUT OF OR RELATING TO ANY OF THE LOAN PAPERS OR ANY JUDGMENT ENTERED BY ANY
COURT IN RESPECT THEREOF, MAY BE BROUGHT OR ENFORCED IN THE COURTS OF THE STATE
OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES

                                       34
<PAGE>


COURTS LOCATED IN THE STATE OF TEXAS, COUNTY OF MIDLAND, OR IN THE UNITED STATES
COURTS  LOCATED  IN THE STATE OF TEXAS,  AS  LENDER IN ITS SOLE  DISCRETION  MAY
ELECT,  AND BORROWER  HEREBY SUBMITS TO THE  NONEXCLUSIVE  JURISDICTION  OF SUCH
COURTS FOR THE PURPOSE OF ANY SUCH SUIT,  ACTION OR PROCEEDING.  BORROWER HEREBY
IRREVOCABLY  CONSENTS TO SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN
ANY OF SAID COURTS BY THE MAILING  THEREOF BY LENDER BY  REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID,  TO BORROWER,  AT ITS ADDRESS SET FORTH HEREIN.  BORROWER
HEREBY  IRREVOCABLY  WAIVES ANY OBJECTIONS  THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF VENUE OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING
TO ANY OF THE OTHER LOAN PAPERS BROUGHT IN ANY OF SAID COURTS AND HEREBY FURTHER
IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN
ANY SUCH COURT HAS BEEN BROUGHT IN AN  INCONVENIENT  FORUM.  THE BORROWER HEREBY
WAIVES,  TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO
TRIAL  BY  JURY  IN ANY  LEGAL  PROCEEDING  ARISING  OUT OF OR  RELATED  TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     10.8 Usury Savings Clause.  Nothing contained in this Agreement,  the Note,
any other Loan Paper or in any other Agreement or undertaking relating hereto or
to  the  Obligation  shall  be  construed  to  obligate   Borrower,   under  any
circumstances  whatsoever,  to pay  interest  at a rate in excess of the Highest
Lawful  Rate.  All sums paid  hereunder  or under the Note that are deemed to be
interest  shall be spread and prorated over the entire period for which the Note
is outstanding.  In the event that any sums received hereunder from Borrower are
at any time under applicable law deemed or held to provide a rate of interest in
excess of the  Highest  Lawful  Rate,  the  effective  rate of  interest  on the
Obligation  shall be deemed reduced to and shall be the Highest Lawful Rate, and
Borrower and any other parties hereby agree to accept as their sole remedy under
such circumstances  either the return of any sums of interest that may have been
collected in excess of the Highest Lawful Rate or the  application of these sums
as a credit against the unpaid  principal  amount of the Note,  whichever remedy
may be elected by Lender.  In  addition,  in the event that the  maturity of the
Note is accelerated by reason of the election by Lender  hereunder,  then earned
interest  may never  include  more than the amount  calculated  pursuant  to the
Highest Lawful Rate, and if unearned interest is provided for in the Note or the
other Loan  Papers,  Borrower  and any other  parties  liable on said  documents
hereby agree to accept as their sole remedy under such circumstances  either (a)
the cancellation of said unearned  interest,  or (b) if theretofore paid, either
the  return to  Borrower  or the  crediting  of said  unearned  interest  on the
principal amount due under the Note or other documents,  whichever action may be
elected  by Lender.  To the extent the  Highest  Lawful  Rate is  determined  by
reference  to the laws of the State of Texas,  same shall be the weekly  ceiling
provided for in Chapter 303 of the Texas Finance Code, as amended, provided that
Lender may, by notice to Borrower,  elect such other  reference as is allowed by
said statutes.

     10.9 Enforceability. If one or more of the provisions contained in the Loan
Papers shall, for any reason, be held to be invalid, illegal or unenforceable in
any respect, such in validity, illegality, or unenforceability shall not affect
any other provision of the Loan Papers or any other instrument referred to
herein.



<PAGE>

                                     35

     10.10 Binding Effect. The Loan Papers shall be binding upon and inure to
the benefit of Borrower and Lender and their respective successors and assigns;
provided, however, that Borrower shall not assign any Rights, duties or
obligations under the Loan Papers without the prior written consent of Lender.

     10.11 No Third Party Beneficiary.

          (a) The parties do not intend the benefits of the Loan Papers to inure
     to any third party, nor shall the Loan Papers be construed to make or
     render Lender liable to any third party, including, without limitation, any
     materialman, supplier, contractor, subcontractor, purchaser, lessor or
     lessee having a claim against Borrower. Notwithstanding anything contained
     in the Loan Papers, or any conduct or course of conduct by any or all of
     the parties hereto, whether before or after signing this Agreement or any
     other Loan Paper, no Loan Paper shall be construed as creating any right,
     claim or cause of action against Lender in favor of any third party,
     including, without limitation, any materialman, supplier, contractor,
     subcontractor, purchaser, lessor or lessee having a claim against Borrower.

          (b) All conditions to the obligation of Lender to make Advances
     hereunder are imposed solely and exclusively for the benefit of Lender, and
     no other person shall have standing to require satisfaction of such
     conditions in accordance with their terms or be entitled to assume that
     Lender will make or refuse to make Advances in the absence of strict
     compliance therewith, and any or all of such conditions may be freely
     waived in whole or in part by Lender at any time if Lender, in its sole and
     absolute discretion, deems it advisable to do so.

     10.12 Delegation by Lender. Lender may perform any of its duties or
exercise any of its Rights by or through its officers, directors, employees,
attorneys, agents or other representatives.

     10.13 Setoff.  Borrower hereby grants to Lender (and to each participant to
whom Lender has conveyed or may hereafter  convey a  participation  in the Note)
the right of setoff to secure payment of the Obligation upon any and all moneys,
securities  or other  property of Borrower  and the proceeds  therefrom,  now or
hereafter  held or received by or in transit to, Lender or any such  participant
or any agent of Lender or such participant, from or for the account of Borrower,
whether for safekeeping, custody, pledge, transmission, collection or otherwise,
and also upon any and all deposits (general or specific) and credits of Borrower
and any and all claims of Borrower against Lender or any such participant at any
time existing.  Notwithstanding  the foregoing,  nothing  contained herein shall
grant to Lender  the right of setoff  against  an  account  if Lender has actual
knowledge  that any person other than Borrower or any Subsidiary of Borrower has
an ownership interest in such account.

     10.14 Additional Documents. It is contemplated that there may be certain
supplementary and/or corrective mortgages, deeds of trust, security agreements
and similar items prepared by Lender to be executed by Borrower subsequent
hereto, as well as certain other corrective and additional documentation not
executed concurrently with this Agreement because of the unavailability of
information such as property and collateral descriptions at the




<PAGE>

                                     36

time of the execution  hereof.  Borrower  hereby agrees to cooperate with Lender
and provide such  information  in connection  therewith as Lender may reasonably
request,  and to execute and deliver  such other and  further  documentation  as
Lender shall reasonably  request so as to provide Lender with a Bank Lien on the
Collateral.

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

     10.16 Amendments. Neither this Agreement nor any provision hereof may be
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by Borrower and Lender.

     10.17 Headings. All headings used herein are for convenience and reference
purposes only and shall not affect the substance of this Agreement.

     10.18 Conflicts. In the event that there exists any conflict or
inconsistency between the terms hereof and the terms of any other Loan Paper,
the terms hereof shall govern and control, provided that the fact that any
representation, warranty or covenant contained in any other Loan Paper is not
contained herein shall not be, or be deemed to be, a conflict or inconsistency.

     10.19 Entirety. This Agreement and the other Loan Papers embody the entire
agreement among the parties and supersede and supplant all prior agreements and
understandings with respect to the matters contained herein.

     10.20 Participations. Lender may at any time, or from time to time, sell or
agree to sell to one or more other persons a participation in all or any part of
the Obligation,  in which event each such other participant shall be entitled to
the rights and benefits  under this  Agreement and the other Loan Papers.  It is
understood and agreed that Lender may provide to  participants  and  prospective
participants  financial information and reports and data concerning Borrower and
Borrower's properties and operations as have been provided to Lender pursuant to
this Agreement.

     10.21 Notice of Final Agreement. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.




<PAGE>

                                     37

     EXECUTED as of the date first above written.

                                      PARALLEL PETROLEUM CORPORATION,
                                      a Delaware corporation


                                      By:       /s/ Larry C. Oldham
                                                Larry C. Oldham
                                                President

                                      FIRST AMERICAN BANK, SSB


                                      By:     /s/ Frank K. Stowers
                                              Frank K. Stowers
                                              Senior Vice President





                                       38




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