FORTUNE NATURAL RESOURCES CORP
CREDIT AGREEMENT WITH ENERQUEST
<DOCUMENT>
<TYPE>EX-10
<SEQUENCE>3
<FILENAME>creditagrmt.txt
<DESCRIPTION>CREDIT AGREEMENT WITH ENERQUEST
<TEXT>

                                CREDIT AGREEMENT

      THIS CREDIT AGREEMENT, made and entered into this 13th day of September,
2002 by and between FORTUNE NATURAL RESOURCES COMPANY (the "Borrower"), and
ENERQUEST OIL & GAS, L.L.C. ("Lender").


                              W I T N E S S E T H:

      WHEREAS, on or about August 28, 2002 Lender and Borrower entered into
that certain loan transaction (the "Loan") wherein Borrower received a loan from
Lender in the amount of $450,000.00 evidenced by that certain Restated and
Increased Promissory Note (the "Restated Note"); and

      WHEREAS, the Restated Note was an amendment, increase and restatement of
that certain 10% Secured Promissory Note in the original principal sum of
$200,000.00 (the "Original Note") dated as of May 14, 2002 from the Borrower in
favor of Barry W. Blank, trustee, f/b/o Barry W. Blank Living Trust; and

      WHEREAS, the Original Note was purchased by Lender by virtue of that
certain Transfer of Note and Lien dated as of August 28, 2002 from Barry W.
Blank, trustee, f/b/o Barry W. Blank Living Trust, as Assignor, to Lender, as
Assignee and thereafter amended, restated and increased pursuant to the terms
and provisions of the Restated Note; and

      WHEREAS, Borrower has requested additional funding from Lender and Lender
agrees to make additional advances to Borrower based on the terms hereof;

      NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree as follows:

                                   ARTICLE 1

                                  DEFINITIONS

      1.1  Terms Defined Above. As used in this Agreement, the terms,
"Borrower", "Restated Note", and "Lender" shall have the meaning assigned to
such terms hereinabove. Defined terms used herein in the singular shall import
the plural and vice versa.

      1.2  Additional Defined Terms. As used in this Agreement, each of the
following terms shall have the meaning assigned thereto in this Section, unless
the context otherwise requires:

      "Advance" shall mean an advance of funds made by the Lender to the
Borrower under this Agreement, including any amounts evidenced by the Lease
Note.

      "Advance Request" shall mean a written request from any Borrower for an
Advance under the Lease Loan, substantially in the form of Exhibit "A" attached
hereto.

<PAGE>

      "Affiliate" shall mean any Person, who, directly or indirectly, controls,
is controlled by or is under common control with the relevant Person. For the
purposes of this definition, "control" (including, with correlative meanings,
the terms "controlled by" and "under common control with"), as used with respect
to any Person, shall mean a member of the board of directors, a partner or an
officer of such Person, or any other Person with possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of such Person, through the ownership (of record, as trustee, or by
proxy) of voting shares, partnership interests or voting rights, through a
management contract or otherwise. Any Person owning or controlling directly or
indirectly ten percent (10%) or more of the voting shares, partnership interests
or voting rights, or other equity interest of another Person shall be deemed to
be an Affiliate of such Person.

      "Agreement" shall mean this Credit Agreement and all exhibits and
schedules hereto, as the same may be amended, modified, supplemented or restated
from time to time according to the terms hereof.

      "Available Commitment" shall mean that amount determined by subtracting
the Lease Loan Balance from the Commitment Amount.

      "Base Rate" shall mean, at any time, ten percent (10%) per annum. Interest
shall be calculated on the basis of a year of 360 days..

      "Borrowing Base" shall mean, at any time, the maximum amount of credit
that Lender is willing to extend under the Lease Note as set forth on Exhibit
"B" attached hereto and made a part hereof.

      "Bridge Notes" shall collectively mean a series of promissory notes in
form and substance identical to the note attached as Exhibit "K" attached hereto
and made a part hereof.

      "Business Day" shall mean a day other than a Saturday, Sunday or legal
holiday for commercial banks under the laws of the State of Oklahoma.

      "Closing Date" shall mean the effective date of this Agreement.

      "Code" shall mean the United States Internal Revenue Code as amended from
time to time.

      "Collateral" shall mean Borrower's Oil and Gas Properties, and any other
Property of the Borrower, or any other Person, wherever located and whether now
owned or existing or hereafter acquired or arising, that is now or at any time
used or intended by any Borrower and the Lender to be subject to the Liens
created in the Security Instruments or otherwise as security for the payment or
performance of all or any portion of the Obligations, including, without
limitation, products and proceeds existing in connection with any of the
foregoing.

      "Commitment Amount" shall mean with respect to the Lease Loan, the lesser
of the amount of: (A) $325,000.00; or (B) the amount determined set forth on
Exhibit "B" for the dates established thereon.


                                       2
<PAGE>


      "Commitment Period" shall mean the period from and including the Closing
Date to, but not including, the Maturity Date.

      "Compliance Certificate" shall mean each certificate, substantially in the
form attached hereto as Exhibit "C", executed by the Responsible Officer and
furnished to the Lender from time to time in accordance with this Agreement.

      "Contested in Good Faith" shall mean a matter (a) which is being contested
in good faith by or on behalf of any Person, by appropriate and lawful
proceedings diligently conducted, satisfactory to the Lender, and for which a
reserve has been established in an amount determined in accordance with GAAP,
(b) in which foreclosure, distraint, sale, forfeiture, levy, execution or other
similar proceedings have not been initiated or have been stayed and continue to
be stayed, and (c) in which a good faith contest will not materially detract
from the value of the Collateral, materially jeopardize the rights of the Lender
or the Borrower with respect thereto, materially interfere with the operation by
any Borrower of its business, or otherwise have a Material Adverse Effect.

      "Contingent Obligation" shall mean, as to any Person, any obligation of
such Person guaranteeing or in effect guaranteeing any Indebtedness, leases,
dividends or other obligations of any other Person (for purposes of this
definition, a "primary obligation") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
regardless of whether such obligation is contingent, (a) to purchase any primary
obligation or any Property constituting direct or indirect security therefore,
(b) to advance or supply funds (i) for the purchase or payment of any primary
obligation, or (ii) to maintain working capital or equity capital of any other
Person in respect of any primary obligation, or otherwise to maintain the net
worth or solvency of any other Person, (c) to purchase Property, securities or
services primarily for the purpose of assuring the owner of any primary
obligation of the ability of the Person primarily liable for such primary
obligation to make payment thereof, or (d) otherwise to assure or hold harmless
the owner of any such primary obligation against loss in respect thereof, with
the amount of any Contingent Obligation being deemed to be equal to the stated
or determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof as determined by such Person
in good faith.

      "Current Assets" and "Current Liabilities" shall mean, at any time, all
assets or liabilities, respectively, that should, in accordance with GAAP, be
classified as current assets or current liabilities, respectively, on the
balance sheet of the Borrower .

      "Default" shall mean any event or occurrence which with the lapse of time
or the giving of notice or both would become an Event of Default.

      "Default Rate" shall mean a per annum variable interest rate equal to the
Base Rate plus five percent (5.00%), calculated on the basis of a year of 360
days and actual number of days elapsed (including the first day but excluding
the last day), but in no event exceeding the Highest Lawful Rate.

                                       3
<PAGE>

      "Environmental Complaint" shall mean any written complaint, order,
directive, claim, citation, notice of environmental report or investigation or
other notice by any Governmental Authority or any other Person with respect to
(a) air emissions, (b) spills, releases or discharges to soils or any
improvements located thereon, surface water, groundwater or the sewer, septic
system or waste treatment, storage or disposal systems servicing any Property of
any Borrower, (c) solid or liquid waste disposal, (d) either the use,
generation, storage, transportation or disposal of any Hazardous Substance, or
(e) other environmental, health or safety matters affecting any Property of any
Borrower or the business conducted thereon.

      "Environmental Laws" shall mean (a) the following federal laws as they may
be cited, referenced and amended from time to time: the Clean Air Act, the Clean
Water Act, the Safe Drinking Water Act, the Water Pollution Control Act, the
Environmental Pesticides Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the Endangered Species Act, the Resource
Conservation and Recovery Act, the Occupational Safety and Health Act, the
Hazardous Materials Transportation Act, the Superfund Amendments and
Reauthorization Act, and the Toxic Substances Control Act; (b) any and all
equivalent environmental statutes of any state in which Property of any Borrower
is situated, as they may be cited, referenced and amended from time to time; (c)
any so-called federal, state or local "Superfund" or "Superlien" statutes, (d)
any rules or regulations promulgated under or adopted pursuant to the above
federal and state laws; and (e) any other equivalent federal, state or local
statute or any requirement, rule, regulation, code, ordinance or order adopted
pursuant thereto, including, without limitation, those relating to the
generation, transportation, treatment, storage, recycling, disposal, handling or
release of Hazardous Substances.

      "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations thereunder and interpretations
thereof.

      "Event of Default" shall mean any of the events specified in Section 9.

      "Exploration Agreement" shall mean that certain Exploration Agreement
dated February 1, 2002, by and among Borrower and PrimeEnergy Management
Corporation, Channel Exploration, LLC, Cymraec Exploration, Inc., Lonesome Dove
Petroleum, Inc., Braveheart Holdings, LLC, and Southwestern Eagle, LLC.

      "Financial Statements" shall mean statements of the financial condition of
the Borrower as at the point in time and for the period indicated and consisting
of at least (i) a balance sheet, (ii) an income statement, (iii) a statement of
cash flow, and (iv) such other financial statements pertaining to the financial
condition or operations of the Borrower as the Lender may request, all of which
shall be certified by the Borrower's Responsible Officer as being prepared
pursuant to GAAP consistently applied and when applicable in comparative form
with respect to the corresponding period of the preceding fiscal period or as
otherwise required by Lender.

      "GAAP" shall mean generally accepted accounting principles established by
the Financial Accounting Standards Board or the American Institute of Certified
Public Accountants and in effect in the United States from time to time during
the term of this Agreement.


                                       4
<PAGE>

      "Governmental Authority" shall mean any nation, country, commonwealth,
territory, government, state, county, parish, municipality or other political
subdivision and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

      "Hazardous Substances" shall mean flammables, explosives, radioactive
materials, hazardous wastes, asbestos or any material containing asbestos,
polychlorinated biphenyls (PCB's), toxic substances or related materials,
petroleum and petroleum products and associated oil or natural gas exploration,
production and development wastes or any substances defined as "hazardous
substances," "hazardous materials", "hazardous wastes" or "toxic substances"
under the Comprehensive Environmental Response, Compensation and Liability Act,
as amended, the Superfund Amendments and Reauthorization Act, as amended, the
Hazardous Materials Transportation Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Toxic Substances Control Act, as amended, or
any other law or regulation now or hereafter enacted or promulgated by any
Governmental Authority, including, without limitation, those elements or
compounds which are contained in the list of hazardous substances adopted by the
United States Environmental Protection Agency and the list of toxic pollutants
designated by Congress or the Environmental Protection Agency or under any
Environmental Law.

      "Highest Lawful Rate" shall mean the maximum non-usurious interest rate
permissible under applicable laws of the State of Oklahoma or those of the
United States of America applicable to the Lender, whichever authorizes the
greater rate.

      "Indebtedness" shall mean, with respect to any Person, without
duplication, (a) all liabilities which would appear on a balance sheet of such
Person, prepared in accordance with GAAP (b) all obligations of such Person
evidenced by bonds, debentures, promissory notes or such similar evidences of
indebtedness, (c) all other indebtedness of such Person for borrowed money, and
(d) all obligations of others, to the extent any such obligation is secured by a
Lien, except a Permitted Lien, on the assets of such Person (whether or not such
Person has assumed or become liable for the obligation secured by such Lien).

      "Insolvency Proceeding" shall mean application (whether voluntary or
instituted by another Person) for or the consent to the appointment of a
receiver, trustee, conservator, custodian or liquidator of any Person or of all
or a substantial part of the Property of such Person, or the filing of a
petition (whether voluntary or instituted by another Person) commencing a case
under Title 11 of the United States Code, seeking liquidation, reorganization or
rearrangement or taking advantage of any bankruptcy, insolvency, debtor's relief
or other similar Law of the United States, the State of Oklahoma or any other
jurisdiction.

      "Law(s)" shall mean all applicable statutes, laws, ordinances, rules,
rulings, interpretations, regulations, judgments, requirements, governmental
authorizations (including licenses, permits, franchises and other governmental
consents necessary for the ownership or operation of Property), orders, writs,
injunctions or decrees (or interpretations of any of the foregoing) of any
Governmental Authority or Tribunal.

      "Lease Loan" shall mean a revolving loan facility to be established by
Lender in favor of Borrower and evidenced by the Lease Note.

                                       5
<PAGE>

      "Lease Loan Balance" shall mean, at any time, the outstanding principal
balance of the Lease Note.

      "Lease Note" shall mean that certain revolving promissory note of the
Borrower in the face amount of $325,000.00 in the form attached hereto as
Exhibit "D-1", together with any and all renewals, extensions for any period,
increases and rearrangements thereof

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

      "Litigation" shall mean any proceeding, claim, lawsuit, and/or
investigation conducted or threatened by or before any Tribunal.

      "Loans" shall mean the loan facilities to be established by Lender in
favor of Borrower pursuant to the terms hereof. The term also includes the sum
of all advances from time to time outstanding under the Notes.

      "Loan Documents" shall mean this Agreement, the Notes, the Security
Instruments and all other documents and instruments now or hereafter delivered
pursuant to the terms of or in connection with this Agreement, the Notes, or the
Security Instruments, and all renewals and extensions of, or amendments or
supplements to, or restatements of any or all of the foregoing from time to time
in effect.

      "Material Adverse Effect" shall mean any set of circumstances or events
which (a) would have any material adverse effect upon the validity or
enforceability of any of the Loan Documents, (b) is or could reasonably be
expected to become material and adverse to the consolidated business, condition
(financial or otherwise), operations or prospects of the Borrower, (c) could
reasonably be expected to materially impair any Borrower's ability to fulfill
its obligations under the terms of the Loan Documents, or (d) causes a Default
or an Event of Default.

      "Maturity Date" shall be February 1, 2005.

      "Mortgaged Properties" shall mean all Oil and Gas Properties of each
Borrower as evidenced by its working interests, royalty interests, any other
interests of any kind or nature, now existing or hereafter acquired, subject to
perfected first-priority Liens pursuant to the Security Instruments in favor of
the Lender, subject only to Permitted Liens, mortgaged as security for the
Obligations.

      "Notes" shall collectively mean the Lease Note and the Reserve Note,
together with any and all renewals, extensions for any period, increases and
rearrangements thereof.

      "Obligations" shall mean, without duplication, (a) all Indebtedness
evidenced by the Notes, and (b) all other obligations and liabilities of the
Borrower to the Lender, now existing or hereafter incurred, under, arising out
of or in connection with any Loan Document, and with respect to all of the
foregoing to the extent that any of the same includes or refers to the payment
of amounts deemed or constituting interest, only so much thereof as shall have
accrued, been earned and remains unpaid at each relevant time of determination.

                                       6
<PAGE>

      "Oil and Gas Properties" shall mean fee, leasehold or other interests, of
any type, nature or kind, in or under mineral estates or oil, gas and other
liquid or gaseous hydrocarbon leases with respect to Oil and Gas Properties
situated in the United States or offshore from any State of the United States,
including, without limitation, overriding royalty and royalty interests,
leasehold estate interests, net profits interests, production payment interests
and mineral fee interests, together with contracts executed in connection
therewith and all tenements, hereditaments, appurtenances and Oil and Gas
Properties appertaining, belonging, affixed or incidental thereto.

      "Permitted Liens" shall mean (a) Liens for Taxes incurred in the course of
business (which are not yet due or are being Contested in Good Faith); (b) Liens
in connection with workers' compensation, unemployment insurance or other social
security (other than Liens created by Section 4068 of ERISA), old-age pension or
public liability obligations which are not yet due or are being Contested in
Good Faith; (c) Liens in favor of vendors, carriers, warehousemen, repairmen,
mechanics, workmen, materialmen, construction or similar Liens arising by
operation of Law in the ordinary course of business in respect of obligations
which are not yet due or are being Contested in Good Faith; (d) Liens of
operators and non-operators under joint operating agreements arising in the
ordinary course of the business of any Borrower to secure amounts owing, which
amounts are not yet due and will be paid in accordance with each of such
Borrower's customary business practices, as same exist on the date hereof or are
being Contested in Good Faith; (e) Liens under production sales agreements,
division orders, operating agreements and other agreements customary in the oil
and gas business for processing, producing and selling hydrocarbons; (f)
easements, rights of way, restrictions and other similar encumbrances, and minor
defects in the chain of title which are customarily accepted in the oil and gas
financing industry, none of which interfere with the ordinary conduct of the
business of any Borrower or materially detract from the value or use of the
Property to which they apply; (g) Liens of record under terms and provisions of
the leases, unit agreements, assignments and other transfer of title documents
in the chain of title under which Borrower acquire the relevant Property; (h)
other Liens existing as of the Closing Date and disclosed on Exhibit "E"
attached hereto under the heading "Permitted Liens"; (i) Liens created in favor
of the Lender and other Liens expressly permitted under the Security
Instruments; (j) Liens arising in the ordinary course of business from pledges
or deposits to secure public or statutory obligations, or deposits to secure (or
in lieu of) surety, stay, appeal or customs bonds; encumbrances consisting of
easements, zoning restrictions, or other restrictions on the use of Property,
provided that such encumbrances do not materially impair the use of such
Property for the purposes intended, and none of which are violated by existing
or proposed structure or land use, and such other material encumbrances as have
been disclosed to and approved by Lender in writing; and (k) good faith deposits
in connection with bids, tenders, contracts or leases, performance or other
similar bonds.

      "Person" shall mean an individual, corporation, partnership, trust,
unincorporated organization or a government or any agency or political
subdivision thereof.

      "Plan" shall mean, at any time, any employee benefit plan which is covered
by ERISA and in respect of which any Borrower or any Commonly Controlled Entity
is or, if such plan were terminated at such time, would under Section 4069 of
ERISA be deemed to be an "employer" as defined in Section 3(5) of ERISA.

                                       7
<PAGE>

      "Principal Office" shall mean the office of Lender in Oklahoma City,
Oklahoma County, Oklahoma presently located at 9400 Broadway Extension, Suite
750, Oklahoma City, Oklahoma 73116.

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

      "Release of Hazardous Substances" shall mean any emission, spill, release,
disposal or discharge, except in accordance with a valid permit, license,
certificate or approval of the relevant Governmental Authority, and notice of
which is required to be given thereof by the person responsible for such
emission, spill, release, disposal or discharge to a Governmental Authority of
any Hazardous Substance into or upon (a) the air, (b) soils or any improvements
located thereon, (c) surface water or groundwater, or (d) the sewer, septic
system or waste treatment, storage or disposal system servicing any Property of
any Borrower.

      "Requirement of Law" shall mean, as to any Person, the certificate or
articles of incorporation and by-laws or other organizational or governing
documents of such Person, and any applicable Law, treaty, ordinance, order,
judgment, rule, decree or regulation or determination of any Tribunal or other
Governmental Authority, including, without limitation, rules, regulations and
orders and requirements for permits, licenses, registrations, approvals or
authorizations, in each case as such now exist or may be hereafter amended and
are applicable to or binding upon such Person or any of its Property or to which
such Person or any of its Property is subject.

      "Reserve Note" shall mean that certain restated term promissory note of
the Borrower in the face amount of $350,000.00 in the form attached hereto as
Exhibit "D-2", which amends and restates the Restated Note, together with any
and all renewals, extensions for any period, increases and rearrangements
thereof.

      "Responsible  Officer" shall mean, as to the Borrower,  Tyrone
       --------------------
J.  Fairbanks,  or such  other  officer  as shall be  designated  in
writing to the Lender by Tyrone J. Fairbanks.

      "Security Instruments" shall mean the security instruments executed and
delivered in satisfaction of the condition set forth in Subsection 4.1, and all
other documents and instruments at any time executed as security for all or any
portion of the Obligations, as the same may be amended from time to time. The
term "Security Instruments" shall include those mortgages, deeds of trust,
assignments, security agreements, and financing statements executed in
conjunction with the Former Agreement and any amendments to such documents.

      "Subordinated Notes" shall collectively mean a series of promissory notes
in form and substance identical to the note attached as Exhibit "I" attached
hereto and made a part hereof.

                                       8
<PAGE>

      "Subsidiary" shall mean, as to any Person, a corporation of which shares
of stock having ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) to elect a majority of the board of
directors or other managers of such corporation are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person.

      "Superfund Site" shall mean those sites listed on the Environmental
Protection Agency National Priority List (NPL) and eligible for remedial action,
or any comparable state registry or list in any state of the United States.

      "Taxes" shall mean all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or charges, or other
charges of any nature whatsoever from time to time or at any time imposed by any
Law or Tribunal.

      "Transferee" shall mean any Person to which the Lender has sold, assigned,
transferred or granted a participation in any of the Obligations, as authorized
pursuant to Section 10.1, and any Person acquiring, by purchase, assignment,
transfer or participation, from any such purchaser, assignee, transferee or
participant, any part of such Obligations.

      "Tribunal" shall mean any court, governmental department or authority,
commission, board, bureau, agency, arbitrator or instrumentality of any state,
political subdivision, commonwealth, nation, territory, county, parish, or
municipality, whether now or hereafter existing, having jurisdiction over the
Lender, the Borrower or their respective Property.

      "Warrant" shall collectively mean and refer to that certain Warrant to
Purchase Shares of Common Stock, Warrant Certificate No. 243, dated as of August
30, 2002, representing 1,285,715 warrants of shares of stock of the Borrower,
and that certain Warrant to Purchase Shares of Common Stock, Warrant Certificate
No. 244, dated as of September 10, 2002, representing 642,857 warrants of shares
of stock of the Borrower.

      1.3  Undefined Financial Accounting Terms. Undefined financial accounting
terms used in this Agreement shall be defined according to GAAP at the time in
effect.

      1.4  References. References in this Agreement to Exhibit, Article or
Section numbers shall be to Exhibits, Articles or Sections of this Agreement,
unless expressly stated to the contrary. References in this Agreement to
"hereby," "herein," "hereinafter," "hereinabove," "hereinbelow," "hereof,"
"hereunder" and words of similar import shall be to this Agreement in its
entirety and not only to the particular Exhibit, Article or Section in which
such reference appears.

                                       9
<PAGE>

                                   ARTICLE 2


                      AMOUNT AND TERMS OF CREDIT FACILITIES

      2.1  The Lease Loan. Subject to the terms and conditions of this
Agreement, and in reliance upon the representations and warranties made by
Borrower herein, Lender agrees to make Advances from time to time under the
Lease Note, on or before the Maturity Date, in accordance with the borrowing
procedures set forth in paragraph 2.4 hereof; provided, however, that the Lease
Loan Balance at any one time outstanding under the Lease Note shall not exceed
the Commitment Amount then in effect. No individual Advance when combined with
all other unpaid and outstanding Advances shall exceed the Available Commitment.
Within the limits set forth herein, Borrower may borrow, repay without penalty
or premium, and re-borrow as provided in this paragraph 2.1.

      2.2  The Reserve Loan. Subject to the terms and conditions of this
Agreement, and in reliance upon the representations and warranties made by
Borrower herein, Lender agrees to make and fully fund the Reserve Loan to be
evidenced by the Reserve Note.

      2.3  The Notes. All Advances shall be evidenced by the Notes, which shall
be made, executed and delivered by Borrower to Lender on the Closing Date.
Notwithstanding the principal amount stated on the face of the Notes, the actual
principal amount due from Borrower on account of the Notes shall be the sum of
all Advances made by Lender under the Notes, less all principal payments
actually received by Lender in collected funds for application to the Loans.

      2.4  Use of Proceeds. Proceeds of Advances made under the Reserve Loans
shall be used for corporate purposes. The proceeds of Advances made under the
Lease Loan are restricted to the purchase of oil & gas leases, including any
brokerage costs associated with acquiring such oil & gas leases, and the
purchase of seismic other than the seismic which is the subject of the
Exploration Agreement.

      2.5  Borrowing Procedures. Borrower may request an Advance under the Lease
Loan on any Business Day on or before the Maturity Date. Borrower shall make
each request by giving Lender written notice (which may be sent via facsimile)
in the form of a properly completed and executed Advance Request stating the
amount of the requested Advance. Subject to Borrower's satisfaction of all other
conditions precedent as set forth in Section 4.2 hereof, each Advance under the
Lease Loan will be made on the same Business Day on which Lender receives the
Advance Request, if the Advance Request is received by 10:00 a.m., or on the
following Business Day, if it is received after 10:00 a.m. Unless Lender is
otherwise instructed by any Borrower, Advance Requests may be signed and
submitted on behalf of Borrower by the Responsible Officer.

      2.6  Interest Rate. The outstanding unpaid principal balance of the Notes
shall bear interest at a rate per annum equal to the Base Rate. Upon notice from
Lender to Borrower of the occurrence of any Event of Default, the unpaid
principal amount from time to time outstanding under the Notes shall bear
interest at the Default Rate. Interest shall be computed on the Notes for the
actual number of days elapsed on the basis of a year consisting of 360 days.

                                       10
<PAGE>

      2.7  Scheduled Principal and Interest Payments.
           -----------------------------------------

           2.7.1  Lease Loan. Payments of accrued interest on the outstanding
      principal balance of the Lease Note shall continue to be due and payable
      on the first (1st) day of each and every month and on the Maturity Date.
      Commencing October 1, 2003, and each continuing on the first day of each
      month thereafter, Borrower shall make a principal payment under the Lease
      Note sufficient to reduce the outstanding principal balance thereof to the
      Commitment Amount for the date set forth on Exhibit "B". If on the first
      (1st) day of any month the Lease Loan Balance exceeds the Commitment
      Amount, the Borrower shall immediately make such principal payments as may
      be necessary to reduce the Lease Loan Balance of the Lease Note to an
      amount less than or equal to the Commitment Amount then in effect. The
      entire outstanding principal balance of the Lease Note and all unpaid
      interest accrued thereon shall be due and payable on the Maturity Date.

           2.7.2  Reserve Loan. Payments of accrued interest on the outstanding
      principal balance of the Reserve Note shall continue to be due and payable
      on the first (1st) day of each and every month and on the Maturity Date.
      Commencing March 1, 2003, and each continuing on the first day of each
      month thereafter, Borrower shall make a principal payment under the
      Reserve Note sufficient to reduce the outstanding principal balance
      thereof to the borrowing base amount for the date set forth on Exhibit "F"
      attached hereto (the "Reserve Loan Commitment Amount"). The Reserve Loan
      Commitment Amount shall be further decreased by the amounts set forth on
      Exhibit "G" attached hereto and made a part hereof, if the Oil and Gas
      Properties set forth thereon are sold by the Borrower. If on the first
      (1st) day of any month the Reserve Loan balance exceeds the Reserve Loan
      Commitment Amount, the Borrower shall immediately make such principal
      payments as may be necessary to reduce the Reserve Loan balance of the
      Reserve Note to an amount less than or equal to the Reserve Loan
      Commitment Amount then in effect. The entire outstanding principal balance
      of the Reserve Note and all unpaid interest accrued thereon shall be due
      and payable on the Maturity Date.

      2.8  Making of Payments. All payments (including prepayments) made by
Borrower on account of the Notes shall be made to Lender at any office of
Lender, at or before 2:00 p.m., local time, in lawful money of the United States
of America and in immediately available funds. If any payment under the Notes
shall be due and payable on a day other than a Business Day, the due date
thereof shall be extended to the next succeeding Business Day and, with respect
to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension.

      2.9  Maximum Lawful Interest Rate. It is not the intention of Lender or
Borrower to violate the laws of any applicable jurisdiction relating to usury or
other restrictions on the maximum lawful interest rate. The Loan Documents and
all other agreements between Borrower and Lender, whether now existing or
hereafter arising and whether written or oral, are hereby limited so that in no
event shall the interest paid or agreed to be paid to Lender for use,
forbearance or detention of money loaned, or for the payment or performance of
any covenant or obligation contained herein or in any other Loan Document exceed
the maximum amount permissible under applicable law. If from any circumstances

                                       11
<PAGE>

Lender shall ever receive anything of value deemed interest under applicable law
which would exceed interest at the highest lawful rate, such excessive interest
shall be applied to the reduction of the principal amount owing hereunder, and
not to the payment of interest, or if such excessive interest exceeds any unpaid
balance of principal, such excess shall be refunded to Borrower. All sums paid
or agreed to be paid to Lender for the use, forbearance or detention of loans
evidenced by the Notes shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of the Notes
until payment in full so that the rate of interest on account of such loans is
uniform throughout the term thereof. This Section 2.8 shall control every other
provision of the Loan Documents and all other agreements between Lender and
Borrower contemplated thereby.

      2.10 Voluntary Prepayments. The Borrower shall have the right at any time
or from time to time to prepay without premium or penalty, all or any part of
the balance outstanding on the Notes; provided, however, until all Obligations
are fully paid and satisfied, no unscheduled principal reduction shall excuse
the payment as it becomes due of any payment provided for herein. All
prepayments made pursuant to this Section shall be applied first to accrued and
unpaid interest and then to the Loan balance.

      2.11 Fees.

           (a)    Transaction Costs. Borrower shall pay all fees and expenses
involved in the closing of this Loan; provided, the Borrower will not be
required to pay more than $5,000.00 of such fees and expenses. The Borrower will
pay all costs and expenses associated with recording of Lender's security
interests and the fees and expenses payable by the Lender which are incidental
to the enforcement or defense of this Agreement or any instrument executed
pursuant hereto.

           (b)    Other Fees. In addition to interest on the Notes and such
other fees as set forth herein, Borrower shall pay Lender such other fees as are
mutually agreed upon by and between Borrower and Lender and which such fees may
not be specifically set forth herein.

      2.12 Advances to Satisfy Obligations of Borrower. The Lender may, but
shall not be obligated to, make Advances for the benefit of the Borrower and
apply same to the satisfaction of any condition, warranty, representation or
covenant of the Borrower contained in this Agreement or any other Loan Document.
Any funds so advanced and applied shall be part of the proceeds advanced under
and evidenced by the Notes and shall bear interest at the Default Rate of
interest.

      2.13 Letters in Lieu of Transfer Orders. Notwithstanding any other term or
provisions hereof to the contrary, the Lender agrees that the letters in lieu of
transfer or division orders provided by the Borrower will not be sent to the
addressees thereof prior to the occurrence of an Event of Default, at which time
the Lender may, at its option and in addition to the exercise of any of its
other rights and remedies, send any or all of such letters. In the event Lender
exercises the rights set forth in this Section 2.13, Lender agrees that it shall
request such purchasers of production to remit any proceeds net of lease
operating expenses and production taxes. Lender may accept any gross payments
made despite such requests without liability hereunder.

                                       12
<PAGE>

      2.14 Power of Attorney. The Borrower hereby designates the Lender as its
agent and attorney-in-fact, to act in their name, place and stead (individually
and collectively) for the purpose of completing and delivering any and all of
the letters in lieu of transfer orders delivered by the Borrower to the Lender,
including, without limitation, completing any blanks contained in such letters
and attaching exhibits thereto describing the relevant Collateral. Borrower
hereby ratifies and confirms all that the Lender shall lawfully do or cause to
be done by virtue of this power of attorney and the rights granted with respect
to such power of attorney. This power of attorney is coupled with the interests
of the Lender in the Collateral, shall commence and be in full force and effect
as of the Closing Date and shall remain in full force and effect and shall be
irrevocable until the obligations, if any, of the Lender hereunder have
terminated and the full satisfaction of all Obligations. The powers conferred on
the Lender by this appointment may only be exercised by the Lender by execution
by any Person who, at the time of exercise, is an officer of the Lender, and are
solely to protect the interests of the Lender under the Loan Documents and shall
not impose any duty upon the Lender to exercise any such powers. The Lender
shall be accountable only for amounts that it actually receives or has expressly
directed that others receive as a result of the exercise of such powers..

                                   ARTICLE 3

                COLLATERAL AND OTHER TYPES OF CREDIT ENHANCEMENT

      3.1  Oil and Gas Properties. Borrower shall grant and maintain in favor of
Lender at all times until the Obligations are paid and satisfied in full, valid
first mortgage liens and first, prior and perfected security interests in and to
all their right, title and interest in the Oil and Gas Properties attached as
Exhibit "H" hereto. Borrower shall execute and deliver, or cause to be executed
and delivered, such oil and gas mortgages, deeds of trusts, instruments,
agreements, assignments, financing statements and other documents as may be
reasonably necessary in the opinion of Lender and Lender's counsel to grant
Lender valid first mortgage liens and first, prior and perfected security
interests in and to such Oil and Gas Properties.

      3.2  New Properties. At the time any Advance is used to finance the
acquisition of any Oil and Gas Properties by Borrower, Borrower shall, at
Lender's discretion, grant and thereafter shall maintain in favor of Lender at
all times until the Obligations are paid and satisfied in full, valid first
mortgage liens and first, prior and perfected security interests in and to all
of their right, title and interest in such Oil and Gas Properties. On or before
the 1st and 15th of each month in which the Borrower acquires any new oil & gas
leases, Borrower shall execute and deliver, or cause to be executed and
delivered, such oil and gas mortgages, deeds of trusts, instruments, agreements,
assignments, financing statements and other documents as may be reasonably
necessary in the opinion of Lender and Lender's counsel to grant Lender valid
first mortgage liens and first, prior and perfected security interests in and to
such new Oil and Gas Properties. Borrower further understand and agrees that no
more than $75,000.00 of the Lease Loan may be Advanced on an unsecured basis at
any time for the acquisition of any new oil & gas leases, and the purchase of
seismic other than the seismic which is the subject of the Exploration
Agreement.

      3.3  Warrant. Borrower shall issue Lender the Warrant in substantially the
form of Exhibit "J" attached hereto.

                                       13
<PAGE>

                                   ARTICLE 4

                                   CONDITIONS

      The obligations of the Lender to enter into this Agreement and to make
Advances are subject to the satisfaction of the following conditions precedent
unless waived in writing by Lender:

      4.1  Receipt of Loan Documents and Other Items. The Lender shall have no
obligation under this Agreement unless and until all matters incident to the
consummation of the transactions contemplated herein, shall be satisfactory in
the good faith judgment of the Lender, and the Lender shall have received,
reviewed and approved the following documents and other items, appropriately
executed when necessary and, where applicable, acknowledged, all in form and
substance satisfactory in the good faith judgment of the Lender and dated, where
applicable, of even date herewith or a date prior thereto (unless specifically
noted below to the contrary) and acceptable in the good faith judgment of the
Lender:

           (a)    multiple counterparts of this Agreement, as reasonably
requested by the Lender;

           (b)    the Notes;

           (c)    the Warrant;

           (d)    copies of Borrower's Articles of Incorporation and/or
Certificate of Incorporation and all amendments thereto and by-laws and all
amendments thereto, accompanied by a certificate issued by the secretary or an
assistant secretary of the Borrower, to the effect that each such copy is
correct and complete;

           (e)    certificates of incumbency and signatures of all of Borrower's
officers who are authorized to execute Loan Documents on behalf of Borrower,
executed by the secretary or an assistant secretary of Borrower;

           (f)    copies of corporate resolutions approving the Loan Documents
to be executed by Borrower and authorizing the transactions contemplated herein
and therein, duly adopted by the board of directors of the Borrower, accompanied
by a certificate of the respective secretary or an assistant secretary of
Borrower, to the effect that such copies are true and correct copies of
resolutions duly adopted at a meeting or by unanimous consent of the board of
directors of Borrower and that such resolutions constitute all the resolutions
adopted with respect to such transactions, have not been amended, modified, or
revoked in any respect, and are in full force and effect as of the date of such
certificate;

           (g)    the following Security Instruments transferring, creating,
evidencing, perfecting and otherwise establishing, as applicable, Liens in favor
of the Lender, in and to the Oil and Gas Properties listed and described in
Exhibit "H" and the Collateral;

                                       14
<PAGE>

                  (i)  Mortgage, Security Agreement, Financing Statement and
Assignment of Production and/or Deed of Trust, Security Agreement, Financing
Statement and Assignment of Production from Borrower covering certain Oil and
Gas Properties located in any and all states in which the Oil and Gas Properties
lie, and all improvements, personal property and fixtures related thereto;

                  (ii) Financing  Statements from Borrower, as debtor,
constituent to the document described in clause (i) above;

                  (iii)Undated letters in lieu of transfer orders, in form and
substance satisfactory to the Lender, from the Borrower to each purchaser of
production and disburser of the proceeds of production from or attributable to
the Mortgaged Properties, together with additional letters with the addressees
left blank, authorizing and directing the addressees to make future payments
attributable to production from the Mortgaged Properties net of lease operating
expenses and production taxes directly to the Lender; and

           (h)    Financial  Statements  of the  Borrower  dated as of June 30,
2002;

           (i)    certificates dated as of a recent date from the Secretary of
State or other appropriate Governmental Authority evidencing the existence or
qualification and good standing of Borrower in the States of Delaware and Texas
and all other jurisdictions covered by the Oil and Gas Properties where such
qualification is required and where failure to be qualified or in good standing
could reasonably be expected to have a Material Adverse Effect;

           (j)    results of searches of the UCC records of the State of
Oklahoma and any and all other jurisdictions in which Oil and Gas Properties are
located from a source acceptable to the Lender and reflecting no Liens, other
than Permitted Liens, against any of the Collateral as to which perfection of a
Lien is accomplished by the filing of a financing statement;

           (k)    opinion of Borrower's counsel substantially in the form
acceptable to Lender;

           (l)    a Request for Advance received by the Lender on or before
10:00 a.m., Central Standard or Daylight Savings  Time,  as the case may be,
on the day preceding the Closing Date;

           (m)    such otheragreements, documents, items, instruments, opinions,
certificates, waivers, consents and evidence as the Lender may reasonably
request; and

           (n)    the Borrower and any Affiliate thereof shall have made written
disclosure of any and all pending or threatened litigation matters to Lender,
and Lender shall be satisfied that such litigation matters are not expected to
result in any material impairment of the ownership of the Borrower in any
Collateral or to have a Material Adverse Effect on the Borrower or any
Affiliate; and

      4.2  Each Advance Under the Notes. In addition to the conditions precedent
stated in Section 4.1 having been fulfilled as of the Closing Date, the Lender
shall not be obligated to make any Advance unless;

                                       15
<PAGE>

           (a)    the Borrower shall have delivered to the Lender a Request for
Advance at least the requisite time prior to the requested date for the relevant
Advance; and each statement or certification made in such Request for Advance
shall be true and correct in all material respects on the requested date for
such Advance;

           (b)    no Event of Default or Default exists or, or by virtue of
any requested Advance, shall exist or will occur;

           (c)    if requested by the Lender, the Borrower shall have delivered
evidence satisfactory in the good faith judgment of the Lender substantiating
any of the matters contained in this Agreement which are necessary to enable the
Borrower to qualify for such Advance;

           (d)    no event shall have occurred which, in the reasonable
opinion of the Lender, could have a Material Adverse Effect;

           (e)    each of the representations and warranties contained in this
Agreement shall be true and correct in all material respects and shall be deemed
to be repeated by the Borrower as if made on the requested date for such
Advance;

           (f)    the Security Instruments shall be in full force and effect and
provide to the Lender the Liens intended thereby;

           (g)    to the extent of each Borrower's undivided interest therein,
such Borrower shall hold full legal title to the Collateral and be the sole
beneficial owner thereof, except for Permitted Liens;

           (h)    the Lender shall have received reimbursement from the
Borrower, or legal counsel for the Lender shall have received payment from the
Borrower, for all reasonable fees and expenses of counsel to the Lender for
which the Borrower are responsible pursuant to applicable provisions of this
Agreement and for which invoices have been presented as of or prior to the date
of the relevant Advance; and

           (i)    all material matters incident to the consummation of the
transactions hereby contemplated shall be satisfactory in the good faith
judgment of the Lender.

                                   ARTICLE 5

                         REPRESENTATIONS AND WARRANTIES

      To induce the Lender to enter into this Agreement and to make the
Advances, the Borrower represents and warrants to the Lender (which
representations and warranties shall survive the delivery of the Notes) that:

                                       16
<PAGE>

      5.1  Due Authorization and Corporate Existence. The execution and
delivery by Borrower of this Agreement and the borrowings hereunder; the
execution and delivery by the Borrower of the Notes; the repayment of the Notes
and interest and fees provided for in the Notes and this Agreement; the
execution and delivery of the Security Instruments by Borrower and the
performance of all obligations of Borrower under the Loan Documents and the
Warrant are within the powers of Borrower and have been duly authorized by all
necessary corporate action of Borrower. Borrower is a corporation legally
existing and in good standing under the laws of the State of Texas and Delaware
and is duly qualified as a foreign corporation and is in good standing in all
states in which it is doing business, except where failure to be qualified will
not have a Material Adverse Effect.

      5.2  Consents, Conflicts and Creation of Liens. The execution and delivery
by Borrower of the Loan Documents and the performance of the obligations of each
Borrower thereunder do not and will not (a) require the consent of any
Governmental Authority, (b) contravene or conflict with any Requirement of Law
which contravention or conflict would have a Material Adverse Effect, (c)
contravene or conflict with any indenture, instrument or other agreement to
which Borrower is a party or by which any Property of Borrower may be presently
bound or encumbered, or (d) result in or require the creation or imposition of
any Lien in, upon or of any Property of any Borrower under any such indenture,
instrument or other agreement, other than the Loan Documents.

      5.3  Valid and Binding Obligations. All of the Loan Documents, when duly
executed and delivered by Borrower, will be the legal, valid and binding
obligations of Borrower, enforceable against Borrower by the Lender in
accordance with their respective terms, except as limited by equitable
principals and applicable liquidation, conservatorship, bankruptcy, moratorium,
arrangement, receivership, insolvency, reorganization or similar laws from
time-to-time affecting the rights of creditors generally.

      5.4  Title to Assets and Oil and Gas Properties. Borrower has defensible
title to all of its Properties and Oil and Gas Properties including the
Mortgaged Properties free and clear of all Liens and such defects in title that
individually or in the aggregate would not reasonably be expected to have a
Material Adverse Effect except Permitted Liens.

      5.5  Scope and Accuracy of Financial Statements. The Financial Statements
of the Borrower dated as of the dates set forth in Section 4.1(h) present fairly
the financial position and results of operations of the Borrower as at the
relevant point in time or for the period indicated. No event or circumstance has
occurred since the dates set forth in Section 4.1(h) which could reasonably be
expected to have a Material Adverse Effect.

      5.6  Liabilities, Litigation, and Restrictions. Other than as disclosed on
the Financial Statements of the Borrower dated as of the dates set forth in
Section 4.1(h), the Borrower have no liabilities, direct or contingent, which
may materially and adversely affect its business, operations or ownership of the
Collateral. No Litigation of any nature affecting any Borrower is pending before
any Tribunal or, to the best knowledge of any Borrower, threatened against or
affecting such Borrower which might reasonably be expected to result in any
material impairment of its ownership of any Collateral or to have a Material
Adverse Effect. To the best knowledge of Borrower, after due inquiry, no unusual
or unduly burdensome restriction, restraint or hazard exists by contract,
Requirement of Law, or otherwise relative to the material business or operations
of Borrower or the ownership and operation of a material portion of the
Collateral other than such as relate generally to Persons engaged in business
activities similar to those conducted by Borrower.

                                       17
<PAGE>

      5.7  Authorizations and Consents. No authorization, consent, approval,
exemption, franchise, permit or license of, or filing with, any Governmental
Authority, Tribunal or any other Person is required to authorize or is otherwise
required in connection with the valid execution and delivery by the Borrower of
the Loan Documents, or any instrument contemplated hereby or thereby, the
repayment by the Borrower of the Notes and the interest and fees provided in the
Notes and this Agreement, or the performance (except in the Event of Default) by
the Borrower of the Obligations.

      5.8  Compliance with Laws. To the best of Borrower's knowledge, Borrower
and its Property, including, without limitation, the Mortgage Properties, are in
compliance in all material respects with all applicable Requirements of Law,
including, without limitation, Environmental Laws, the Natural Gas Policy Act of
1978, as amended, and ERISA, except such noncompliance that would not reasonably
be expected to have a Material Adverse Effect.

      5.9  Proper Filing of Tax Returns and Payment of Taxes Due. Borrower has
duly and properly filed their United States income tax returns and all other tax
returns which are required to be filed by such Borrower. Borrower has paid all
taxes due except such as are being Contested in Good Faith and as to which
adequate provisions and disclosures have been made. The charges and reserves of
Borrower with respect to taxes and other governmental charges are adequate, and
Borrower has no knowledge of any deficiency or additional assessment in a
material amount in connection with taxes, assessments, or charges not provided
for on its books.

      5.10 ERISA. Borrower is in compliance in all material respects with the
applicable provisions of ERISA, and no "reportable event", as such term is
defined in Section 4043 of ERISA, has occurred with respect to any Plan of
Borrower. The Borrower will promptly furnish to the Lender immediately upon
becoming aware of the occurrence of any "reportable event", as such term is
defined in Section 4043 of ERISA, or of any "prohibited transaction", as such
term is defined in Section 4975 of the Internal Revenue Code of 1954, as
amended, in connection with any Plan or any trust created thereunder, a written
notice signed by a Responsible Officer specifying the nature thereof, what
action Borrower is taking or proposes to take with respect thereto, and, when
known, any action taken by the Internal Revenue Service with respect thereto.

      5.11 Environmental  Laws.  To the best  knowledge  and  belief  of
Borrower, except as would not have a Material Adverse Effect:

           (a)    no Property of Borrower is currently on or has ever been on,
or is adjacent to any Property which is on or has ever been on, any federal or
state list of Superfund Sites;

           (b)    no Hazardous Substances have been generated, transported
and/or disposed of by Borrower at a site which was, at the time of such
generation, transportation and/or disposal, or has since become, a Superfund
Site;

           (c)    except in accordance with applicable Requirements of Law or
the terms of a valid permit, license, certificate or approval of the relevant
Governmental Authority, no Release of Hazardous Substances by Borrower or from,
affecting or related to any Property of Borrower or adjacent to any Property of
Borrower has occurred; and

           (d)    no Environmental Complaint has been received by Borrower.

                                       18
<PAGE>

      5.12 No Material Misstatements. To Borrower's knowledge, no information,
exhibit, statement or report furnished to the Lender by or at the direction of
Borrower in connection with this Agreement contains any material misstatement of
fact or omits to state a material fact necessary to make the statements
contained therein not misleading as of the date made or deemed made.

      5.13 Casualties or Taking of Property. Neither the business nor any
Property of Borrower has been materially adversely affected as a result of any
fire, explosion, earthquake, flood, drought, windstorm, accident, strike or
other labor disturbance, embargo, requisition or taking of Property or
cancellation of contracts, permits or concessions by any Governmental Authority,
riot, activities of armed forces or acts of God, which, as a result thereof,
could reasonably be expected to have a Material Adverse Effect.

      5.14 Locations of Business, Offices, and Property. The principal place of
business and chief executive office of the Borrower is located at the address of
the set forth in Section 10.3 or at such other location as the Borrower may
have, by proper written notice hereunder, advised the Lender, provided that such
other location of the Borrower is within a state in which appropriate financing
statements from the Borrower, or any one of them, in favor of the Lender have
been filed.

      5.15 Security Instruments. The provisions of each Security Instrument are
effective to create in favor of the Lender, a legal, valid and enforceable Lien,
except as limited by equitable principles and applicable liquidation,
conservatorship, bankruptcy, moratorium, arrangement, receivership, insolvency,
reorganization or similar laws from time-to-time affecting the rights of
creditors generally, in all right, title and interest of the Borrower, or any
one of them, in the Collateral described therein, which Liens, assuming the
accomplishment of recording and filing in accordance with applicable Laws prior
to the intervention of rights of other Persons, shall constitute fully perfected
first-priority Liens on all right, title and interest of the Borrower in the
Collateral described therein, subject to Permitted Liens.

      5.16 Other Notes. Each of the Subordinated Notes is in form and substance
identical to the note attached hereto as Exhibit I. Each of the Bridge Notes is
in form and substance identical to the note attached hereto as Exhibit K. There
are no other instruments, documents or agreements in connection with the
Subordinated Notes or Bridge Notes.

                                   ARTICLE 6

                              AFFIRMATIVE COVENANTS

      Unless agreed in writing by the Lender to the contrary, so long as any
Obligation remains outstanding or unpaid or any commitment to make Advances
exists Borrower shall:

      6.1  Maintenance and Access to Records. Keep adequate records of all its
transactions so that at any time, and from time to time, its true and complete
financial condition may be readily determined, and promptly following the
reasonable request of the Lender, make such records available during Borrower's


                                       19
<PAGE>

customary business hours for inspection by the Lender and, at the expense of the
Borrower, allow the Lender to make copies thereof at the Borrower's premises and
take same to Lender's place of business.

      6.2  Financial Statements. On or before the earlier of the date Borrower
must submit annual financial information to the Securities and Exchange
Commission, or 120 days following the conclusion of each fiscal year of the
Borrower, Borrower shall furnish to the Lender a Financial Statement prepared in
accordance with GAAP and audited by and issued from Grant Thornton L.L.P., or an
independent firm of certified public accountants otherwise acceptable to Lender.
On or before the earlier of the date Borrower must submit quarterly financial
information to the Securities and Exchange Commission, or 45 days following the
conclusion of each fiscal quarter of the Borrower, Borrower shall furnish to the
Lender a Financial Statement prepared in accordance with GAAP. Concurrent with
the Financial Statements, Borrower shall provide a Compliance Certificate
executed by the Responsible Officer stating that he, after due inquiry, has no
knowledge of a Default or Event of Default.

      6.3  Status Reports. Within ten (10) days of the end of each month
hereafter, Borrower shall provide to Lender a copy of the monthly status report
described at Section 2.1.2 of the Exploration Agreement.

      6.4  Exploration Report. On the 1st and 15th day of each month hereafter,
the Borrower shall provide the Lender with a copy of the most recent exploration
report described in the Exploration Agreement.

      6.5  Notification Letter. Upon its receipt of a Notification Letter as
described in Section 2.2.8 of the Exploration Agreement, Borrower shall
immediately provide a copy thereof to Lender.

      6.6  Notices of Certain Events. Deliver to the Lender, immediately upon
the Responsible Officer's having knowledge of the occurrence of any of the
following events or circumstances, a written statement with respect thereto,
signed by the Responsible Officer and setting forth the relevant event or
circumstance and the steps being taken by the Borrower with respect to such
event or circumstance:

           (a)    any Default or Event of Default;

           (b)    any Default or Event of Default under any material contractual
obligation of Borrower or any material Litigation, affecting Borrower before any
Governmental Authority or Tribunal;

           (c)    any Litigation involving Borrower as defendant or in which any
Property of Borrower is subject to a claim (i) in which the amount involved is
$10,000 or more and which is not covered by insurance, (ii) in which, together
with any other outstanding litigation or proceeding (whether or not previously
disclosed hereunder), the aggregate amount involved in all such litigation is
$10,000 or more and which is not covered by insurance, or (iii) in which
injunctive or similar relief is sought which affects a Property having a fair
market value (net to the Borrower's interest therein) of more than $10,000 or
could reasonably be expected to result in an expenditure by Borrower of more
than $10,000;

                                       20
<PAGE>

           (d)    any existing or asserted Lien on any of the Properties of
Borrower, personal or real, tangible or intangible, including without limitation
the Mortgaged Properties, excluding Permitted Liens;

           (e)    the receipt by Borrower of any Environmental Complaint or any
formal request from any Governmental Authority or other Person for information
(other than requirements for compliance reports) regarding any Release of
Hazardous Substances by Borrower from, affecting or related to any Property of
Borrower or adjacent to any Property of the Borrower which Environmental
Complaint or request could reasonably be expected to have a Material Adverse
Effect;

           (f)    any actual, proposed or threatened testing or other
investigation by any Governmental Authority or other Person concerning the
environmental condition of, or relating to, any Property of the Borrower or
adjacent to any Property of Borrower following any allegation of a violation of
any Environmental Law which testing or investigation could reasonably be
expected to have a Material Adverse Effect;

           (g)    any Release of Hazardous Substances by Borrower from,
affecting or related to any Property of Borrower or adjacent to any Property of
Borrower except in accordance with applicable Environmental Law or the terms of
a valid permit, license, certificate or approval of the relevant Governmental
Authority, or the violation of any Environmental Law, or the revocation,
suspension or forfeiture of or failure to renew, any permit, license,
registration, approval or authorization, which Release, violation, revocation,
suspension, forfeiture or failure could reasonably be expected to have a
Material Adverse Effect; and

           (h)    any change in Borrower's accounting practices and procedures,
including a change in its fiscal year; and

           (i)    any Material Adverse Effect.

      6.7  Letters in Lieu of Transfer Orders. Promptly upon a reasonable
request by the Lender at any time and from time to time and without limitation
on the rights of the Lender in accordance with Sections 2.13 and 2.14, execute
such letters in lieu of transfer orders, in addition to the letters signed by
the Borrower and delivered to the Lender in satisfaction of the conditions set
forth in Subsection 4.1(g)(iii), as are necessary or appropriate to cover any
additional, material purchasers of production.

      6.8  Division Orders. Promptly upon request by the Lender at any time and
from time to time following the occurrence of any Event of Default and without
limitation on the rights of the Lender in accordance with Sections 2.13 and
2.14, execute such division and/or transfer orders as are necessary or
appropriate to transfer and deliver to the Lender proceeds from the sale of
hydrocarbon production from or attributable to any Mortgaged Property.

      6.9  Additional Information. Furnish to the Lender, promptly upon the
reasonable request of the Lender, such additional financial, title, engineering,
production or other information concerning the assets, liabilities, operations
and transactions of the Borrower as the Lender may from time to time reasonably
request; and notify the Lender not less than ten Business Days prior to the


                                       21
<PAGE>

occurrence of any condition or event that may change the proper location for the
filing of any financing statement or other public notice or recording for the
purpose of perfecting a Lien in any Collateral, including, without limitation,
any change in name or the location of any principal place of business or chief
executive office of the Borrower; and upon the reasonable request of the Lender,
the Borrower shall execute such additional Security Instruments as may be
necessary or appropriate in connection therewith.

      6.10 Compliance with Laws. In all reasonable and in all material respects,
comply with all applicable Requirements of Law, including, without limitation,
(a) the Natural Gas Policy Act of 1978, as amended, (b) the minimum funding
requirements of ERISA so as not to give rise to any material liability or
reportable event, as defined by ERISA, thereunder, (c) Environmental Laws (i)
related to any natural or environmental resource or media located on, above,
within, in the vicinity of, related to or affected by any Property of the
Borrower, (ii) required for the performance or conduct of the operations of the
Borrower, including, without limitation, all permits, licenses, registrations,
approvals and authorizations, or (iii) applicable to the use, generation,
handling, storage, treatment, transport or disposal of any Hazardous Substances,
the resulting non-compliance of which could have a Material Adverse Effect; and
(d) securities laws and cause all operators, employees, crew members, agents,
contractors, subcontractors and future lessees (pursuant to appropriate lease
provisions) of the Borrower, while such Persons are acting within the scope of
their relationship with the Borrower, to comply with all such Requirements of
Law as may be necessary or appropriate to enable the Borrower to so comply.

      6.11 Payment of Assessments and Charges. Pay all taxes, assessments,
governmental charges, rent and other Indebtedness which, if unpaid, might become
a Lien, other than a Permitted Lien, against the Property of the Borrower,
except any of the foregoing being Contested in Good Faith.

      6.12 Hazardous Substances Indemnification. Indemnify and hold the Lender
harmless from and against any and all claims, losses, damages, liabilities,
fines, penalties, charges, administrative and judicial proceedings and orders,
judgments, remedial actions, requirements and enforcement actions of any kind,
and all costs and expenses incurred in connection therewith (including, without
limitation, reasonable attorneys' fees and expenses), arising directly or
indirectly, in whole or in part, from (a) the presence of any Hazardous
Substances on, under or from any Property of the Borrower, whether prior to or
during the term hereof, (b) any activity carried on or undertaken on or off any
Property of the Borrower, whether prior to or during the term hereof, and
whether by the Borrower, or any predecessor in title, employee, agent,
contractor or subcontractor of the Borrower, or any other Person at any time
occupying or present on such Property, in connection with the handling,
treatment, removal, storage, decontamination, cleanup, transportation or
disposal of any Hazardous Substances at any time located or present on or under
such Property, (c) any residual contamination on or under any Property of the
Borrower, or (d) any contamination of any Property or natural resources of the
Borrower arising in connection with the generation, use, handling, storage,
transportation or disposal of any Hazardous Substances by Borrower, or any
employee, agent, contractor or subcontractor of Borrower, while such Persons are
acting within the scope of their relationship with the Borrower, irrespective of
whether any of such activities were or will be undertaken in accordance with
applicable Requirements of Law, including, without limitation, any of the
foregoing arising from negligence, whether sole or concurrent, on the part of


                                       22
<PAGE>

the Lender; with the foregoing indemnity surviving satisfaction of all
Obligations and the termination of this Agreement, unless all such Obligations
have been satisfied wholly in cash from the Borrower and not by way of
realization against any Collateral or the conveyance of any Property in lieu
thereof, provided that such indemnity shall not extend to any of the foregoing
resulting from the Lender's gross negligence or willful conduct or any act or
omission by the Lender with respect to any Property subsequent to the Lender
becoming the owner of such Property and with respect to which Property such
claim, loss, damage, liability, fine, penalty, charge, proceeding, order,
judgment, action or requirement arises subsequent to the acquisition of title
thereto by the Lender.

      6.13 Maintenance of Corporate Existence and Good Standing. Maintain its
corporate existence or qualification and good standing in all states in which it
is doing business, except where failure to do so will not have a Material
Adverse Effect.

      6.14 Further Assurances. Promptly cure any defects in the execution and
delivery of any of the Loan Documents and all agreements contemplated thereby,
and execute, acknowledge and deliver such other assurances and instruments as
shall, in the good faith and reasonable opinion of the Lender, be necessary to
fulfill the terms of the Loan Documents.

      6.15 Initial Fees and Expenses of Lender and/or Legal Counsel to Lender.
Promptly reimburse the Lender for all reasonable and customary out-of-pocket
expenses of the Lender in connection with this Agreement and all documentation
contemplated hereby (up to $5,000.00), the satisfaction of the conditions
precedent set forth herein and the consummation of the transactions contemplated
in this Agreement (including, without limitation, all recording expenses and all
filing fees).

      6.16 Subsequent Fees and Expenses. Promptly reimburse the Lender (after
the Borrower's receipt of the Lender's request for reimbursement) for all
amounts reasonably expended, advanced or incurred by the Lender, together with
interest thereon as provided in this Section 6.16: (i) to satisfy any of the
Obligations, (ii) to protect or enforce the Lender's rights under any of the
Loan Documents or (iii) to protect the Collateral or business of the Borrower.
The amount so reimbursable pursuant to this Subsection 6.16 shall bear interest
at the per annum interest rate equal to the Base Rate, calculated on a basis of
a calendar year of 360 days, but counting the actual number of days elapsed, on
each such amount from the date of notification that the same was expended,
advanced or incurred by the Lender until the date that it is repaid to the
Lender, with the obligations under this Section 6.16 surviving the
non-assumption of this Agreement in a case commenced under any Insolvency
Proceeding and being binding upon the Borrower and/or a trustee, receiver,
custodian or liquidator of Borrower appointed in any such case.

      6.17 Maintenance and Inspection of Tangible Properties. Maintain all of
their material tangible Properties in good repair and condition, ordinary wear
and tear excepted; make all necessary replacements thereof and operate, if
operated by Borrower, such Properties in a good and workmanlike manner; and
permit any authorized representative or representatives of the Lender to
reasonably visit and inspect any tangible Property of Borrower.

                                       23
<PAGE>

      6.18 Maintenance of Insurance and Evidence Thereof. Continue to maintain
or continue to be maintained, insurance with respect to its Properties and
businesses against such liabilities, casualties, risks and contingencies as is
customary in the relevant industry and sufficient to prevent a Material Adverse
Effect, all such insurance to be in amounts and from insurers reasonably
acceptable to the Lender, and, on the Closing Date or upon any renewal of any
such insurance and at other times upon the reasonable request by the Lender,
furnish to the Lender evidence, satisfactory in the good faith judgment of the
Lender of the maintenance of such insurance.

      6.19 Payment of Notes and Performance of Obligations. Pay the Notes
according to the reading, tenor and effect thereof, as modified hereby, and do
and perform every act as required in the Loan Documents and discharge all other
Obligations. Borrower shall pay when due all amounts under the Exploration
Agreement, shall not otherwise commit any breach thereof or default thereunder,
and shall not permit the Exploration Agreement to become terminated as it
pertains to Borrower.

      6.20 Operation of Oil and Gas Properties/Payment. Develop, maintain and
operate, if Borrower is designated as operator thereof, the Mortgaged Properties
in a prudent and workman-like manner in accordance with industry standards.
Borrower shall pay all invoices on the Oil & Gas Properties when due, but in no
event, later than 75 days after the date of the invoice; provided, that in no
event shall such invoices applicable to any given month remain unpaid if
Borrower has been credited with production revenue for that particular month.
Borrower shall provide Lender, within fifteen (15) days after the end of
particular accounting month, an aged accounts payable report for such accounting
month.

      6.21 Prospects. Borrower shall pay when due all amounts owed under any
operating agreement regarding any Prospect (as defined in the Exploration
Agreement) for an operation to which Borrower has consented. In the event
Borrower determines that it will not consent to any proposed subsequent
operation on any Prospect or other of the Mortgaged Properties, it shall give
notice of such fact to Lender. Such notice shall be in writing and shall be
delivered to Lender within five (5) days of the receipt by Borrower of the
notice of proposed subsequent operation, unless the operating agreement
governing such proposed subsequent operation provides for consent within 48
hours or less, in which case Lender shall be provided by Borrower with notice of
such proposal immediately upon its receipt by Borrower. Thereafter, Lender shall
advise Borrower of whether Lender elects to participate in the proposed
operation within five (5) days of receipt of Borrower's notice, unless the
operating agreement governing such proposed subsequent operation provides for
consent within 48 hours or less, in which case Lender shall advise Borrower of
its election as to whether it desires to participate with 24 hours of its
receipt of Borrower's notice. If Lender elects to participate in the proposed
operation, it shall provide Borrower with written notice of such election within
the time limits provided for herein, and Borrower shall immediately assign
Borrower's interest to Lender, subject to any reversionary interest in Borrower,
and Lender shall thereafter pay the operator of such interest the amount of
Borrower's share of the cost of the proposed operation. Failure of Lender to
provide notice within the time limits provided for herein shall constitute
Lender's unequivocal election to not participate in the proposed operation.
Thereafter, Lender shall bear all risks of a consenting party with respect to
the proposed operation under the applicable operating agreement and shall hold
Borrower harmless therefrom. Lender shall also be entitled to own Borrower's


                                       24
<PAGE>

share of all equipment, facilities, and production associated with or resulting
from such proposed operation until such time as it has recovered the non-consent
penalty provided for in the applicable operating agreement, at which time
ownership of all such facilities, equipment, and production shall revert to
Borrower.

      6.22 Production Report. Within forty-five (45) days from each accounting
month end, Borrower shall furnish Lender two separate monthly summary reports of
oil and gas production. One on an accounting month basis and one on a production
month basis, for the immediately preceding six month's sales volume, sales
revenues, production taxes, operating expenses, capital expenditures and net
operating income from or attributable to the Borrowers' Oil and Gas Properties,
with detailed calculations and worksheets, and, in the case of take or pay or
prepayment agreements during such month, provide copies of same.

      6.23 Existing Business. Maintain its line of business as engaged in as of
the Closing Date unless otherwise consented to by Lender in writing.

                                   ARTICLE 7

                               FINANCIAL COVENANTS

                              Intentionally Omitted



                                   ARTICLE 8

                               NEGATIVE COVENANTS

      Unless agreed in writing by the Lender to the contrary, so long as any
Obligation remains outstanding or unpaid or any Commitment Amount exists,
Borrower shall not:

      8.1  Contingent Obligations. Create, incur, assume or suffer to exist any
Contingent Obligation without the prior written agreement of the Lender.

      8.2  Liens. Create, incur, assume or suffer to exist any Lien on any of
its Oil and Gas Properties or any other Property of the Borrower pledged to
secure the Loans, whether now owned or hereafter acquired; provided however, the
foregoing restrictions shall not apply to Permitted Liens.

      8.3  Sales of Assets. Sell, transfer or otherwise dispose of all or a
substantial portion of the assets of Borrower or any Subsidiaries thereof, now
owned or hereafter acquired, whether pursuant to a single transaction or a
series of transactions pertaining to Mortgaged Properties; provided, however,
Borrower may sell its Oil & Gas Properties identified at Exhibit "G" so long as
the Lender receives (as a principal reduction of the Loans) the greater of (i)
125% of the reserve value set forth on Exhibit "G", or (ii) 50% of the proceeds
of such sale. The phrase "substantial portion of its assets" shall mean asset
sales, which exceed, in the aggregate, $100,000.00 during any one fiscal year,
without the prior written agreement of the Lender. Asset sales specifically
include sales of Oil and Gas Properties.

                                       25
<PAGE>

      8.4  Loans or Advances. Make or agree to make or allow to remain
outstanding any loans or Advances or other extension of credit, direct or
indirect, to any Person or Affiliate.

      8.5  Cancellation of Insurance. Allow any insurance policy required to be
carried hereunder to be terminated or lapse or expire without provision for
adequate renewal or comparable substitution.

      8.6  Mergers and Consolidations; Changes in Corporate Structure. Will not
(i) discontinue business; (ii) make any material change in the nature of or
manner in which it conducts its business; (iii) form any Plan which is subject
to Title IV of ERISA; (v) liquidate, wind-up or dissolve; or (iv) incur any
material change in the current senior and/or executive management of Borrower.

      8.7  Transactions with Affiliates. Directly or indirectly, enter into any
sale, lease or exchange of Property or any contract for the rendering of goods
or services with any Affiliate other than upon fair and reasonable terms no less
favorable than could be obtained in an arm's length transaction with a Person
which is not an Affiliate.

      8.8  Lines of Business. Expand, on its own or through any Subsidiary or
Affiliate, into any line of business other than those in which it is engaged as
of the Closing Date if such an expansion could have a Material Adverse Effect.

      8.9  Organization or Acquisition of Subsidiaries. Organize or acquire any
Subsidiary in addition to those existing as of the Closing Date, if any such
organization or acquisition would have a Material Adverse Effect.



                                   ARTICLE 9

                                EVENTS OF DEFAULT

      9.1  Enumeration of Events of Default. Any of the following events shall
constitute an Event of Default as that term is used herein:

           (a)    default shall be made in the payment when due of any
installment of principal or interest under this Agreement, the Notes or any Fee
provided for herein, which default continues for ten (10) days from written
notice thereof by Lender to Borrower;

           (b)    an Event of Default as defined in any Loan Document shall
have occurred;

           (c)    default shall be made by Borrower in the due observance or
performance of any of its obligations, covenants or agreements contained in any
of the Loan Documents, which default continues for twenty (20) days from written
notice thereof by Lender to Borrower;

           (d)    any representation or warranty made by Borrower in any of the
Loan Documents, including, without limitation, in a Request for Advance, proves
to have been untrue in any material respect or any representation, statement


                                       26
<PAGE>

(including Financial Statements), certificate or data furnished or made to the
Lender in connection herewith proves to have been untrue in any material respect
as of the date the facts therein set forth were stated or certified and such
misrepresentation or breach of warranty has a Material Adverse Effect;

           (e)    Borrower shall (i) apply for or consent to the appointment of
a receiver, trustee or liquidator of it or all or a substantial part of its
assets, (ii) file a voluntary petition commencing an Insolvency Proceeding
concerning Borrower, (iii) make a general assignment for the benefit of
creditors, (iv) be unable, or admit in writing its inability, to pay its debts
generally as they become due, or (v) file an answer admitting the material
allegations of a petition filed against it in any Insolvency Proceeding;

           (f)    an order, judgment or decree shall be entered against Borrower
by any court of competent jurisdiction or by any other duly authorized
authority, on the petition of a creditor or otherwise, granting relief in any
Insolvency Proceeding or approving a petition seeking reorganization or an
arrangement of its debts or appointing a receiver, trustee, conservator,
custodian or liquidator of it or all or any substantial part of its assets and
such order, judgment or decree shall not be dismissed or stayed within 30 days
after the issuance and entry thereof;

           (g)    the levy against any significant portion of the Property of
Borrower, or any execution, garnishment, attachment, sequestration or other writ
or similar proceeding which is not permanently dismissed or discharged within 30
days after the levy and which has a Material Adverse Effect;

           (h)    a final and non-appealable order, judgment or decree shall be
entered against Borrower for money damages and/or Indebtedness due in an amount
in excess of $10,000.00 which is not otherwise covered by insurance for 100% of
the judgment and such order, judgment or decree shall not be dismissed or the
execution thereof stayed within 30 days;

           (i)    any Person shall engage in any Prohibited Transaction
involving any Plan; any "accumulated funding deficiency" (as defined in Section
302 of ERISA), whether or not waived, shall exist with respect to any Plan for
which an excise tax is due or would be due in the absence of a waiver; a
Reportable Event shall occur with respect to, or proceedings shall commence to
have a trustee appointed, or a trustee shall be appointed, to administer or to
terminate, any Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion of the
Lender, likely to result in the termination of such Plan for purposes of Title
IV of ERISA; any Single Employer Plan shall terminate for purposes of Title IV
of ERISA; the Borrower or any Commonly Controlled Entity (as such term is
defined in ERISA) shall incur, or in the reasonable opinion of the Lender, be
likely to incur any liability in connection with a withdrawal from, or the
Insolvency or Reorganization (as such term is defined in ERISA) of, a
Multi-Employer Plan (as such term is defined in ERISA); or any other event or
condition shall occur or exist with respect to a Plan and the result of such
events or conditions referred to in this Section 9.1(j) could subject the
Borrower or any of them, or any Commonly Controlled Entity to any tax
(other than an excise tax under Section 4980 of the Code), penalty or other
liabilities which taken in the aggregate would have a Material Adverse Effect
and any such circumstance shall exist for in excess of 30 days;

                                       27
<PAGE>

           (j)    Borrower shall have (i) concealed, removed or diverted, or
permitted to be concealed, removed or diverted, any part of its Property, with
intent to hinder, delay or defraud its creditors or any of them; (ii) made or
suffered a transfer of any of its Property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar Law; (iii) made any transfer of its
Property to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid with the intent to hinder, delay or
defraud its creditors or any of them; or (iv) shall have suffered or permitted,
while insolvent, any creditor to obtain a Lien upon any of its Property through
legal proceedings or distraint which is not vacated within 30 days from the date
thereof;

           (k)    any Security Instrument shall for any reason not, or cease to,
create valid and perfected first-priority Liens against the Collateral
purportedly covered thereby and such occurrence would have a Material Adverse
Effect;

           (l)    the good faith determination by the Lender that a Material
Adverse Effect has occurred or will occur.

      9.2  Remedies. Upon the occurrence of an Event of Default, immediately and
without notice, (i) all Obligations shall automatically become immediately due
and payable, without presentment, demand, protest, notice of protest, default or
dishonor, notice of intent to accelerate maturity, notice of acceleration of
maturity or other notice of any kind, except as may be provided to the contrary
elsewhere herein, all of which are hereby expressly waived by the Borrower, and
(ii) any obligation to make an Advance shall immediately cease and terminate
unless and until reinstated by the Lender in writing, and in such event, the
Lender is hereby authorized at any time and from time to time, without notice to
the Borrower (any such notice being expressly waived by the Borrower), to
set-off and apply any and all deposits of the Borrower (general or special, time
or demand, provisional or final) held by the Lender, except to the extent any
such deposits contain funds of persons other than Borrower or Borrower's
Subsidiaries, and any and all other indebtedness at any time owing by the Lender
to or for the credit or account of the Borrower against any and all of the
Obligations. Subject to the provisions of this Agreement, upon the occurrence of
any Event of Default the Lender may, in addition to the foregoing, exercise any
or all of its rights and remedies provided by law or pursuant to the Loan
Documents.

      As an alternative remedy to the foreclosure of the Mortgaged Properties,
upon the occurrence of an Event of Default, the Lender shall have the immediate
right to appoint a majority of the Board of Directors. In the event that Lender
elects to exercise such remedy, any transaction between Borrower and Lender
would require the majority vote of those members of the Board not appointed by
Lender.

                                   ARTICLE 10

                                  MISCELLANEOUS

      10.1 Transfers and Participations. The Lender may, at any time, sell,
transfer, assign or grant participations in the Obligations or any portion
thereof; and the Lender may forward to each Transferee and each prospective


                                       28
<PAGE>

Transferee all documents and information relating to such obligations, whether
furnished by the Borrower or otherwise obtained, as the Lender determines
necessary or desirable. The Borrower agrees that each Transferee, regardless of
the nature of any transfer to it, may exercise all rights (including, without
limitation, rights of set-off) with respect to the Obligations held by it as
fully as if such Transferee were the direct holder thereof, subject to any
agreements between such Transferee and the transferor to such Transferee. The
Lender agrees that each such Transferee shall assume all of the obligations of
the Lender pursuant to the Loan Documents.

      10.2 Survival of Representations. Warranties and Covenants. All
representations and warranties of the Borrower and all covenants and agreements
herein made shall survive the execution and delivery of the Notes and the
Security Instruments and shall remain in force and effect so long as any
Obligation is outstanding or any obligation to make an Advance exists.

      10.3 Notices and Other Communications. Except as to verbal notices
expressly authorized herein, which verbal notices shall be confirmed in writing,
all notices, requests and communications hereunder shall be in writing
(including by telegraph or telecopy). Unless otherwise expressly provided
herein, any such notice, request, demand or other communication shall be deemed
to have been duly given or made when delivered by hand, or, in the case of
delivery by mail, deposited in the mail, certified mail, return receipt
requested, postage prepaid, or, in the case of telegraphic notice, when
delivered to the telegraph company, or, in the case of telecopy notice, when
receipt thereof is acknowledged orally, addressed as follows:

      if to the Lender, to:

      ENERQUEST OIL & GAS, L.L.C.
      9400 Broadway Ext., Suite 750
      Oklahoma City, Oklahoma 73114-7401
      Attention: Gregory W. Olson, President

      if to Borrower, to:

      FORTUNE NATURAL RESOURCES COMPANY
      515 W. Greens Road, Suite 720
      Houston, Texas 77067
      Attention:  Tyrone J. Fairbanks, Chief Executive Officer

Any party may, by proper written notice hereunder to the other, change the
individuals or addresses to which such notices to it shall thereafter be sent.

      10.4 Parties in Interest. Subject to applicable restrictions contained
herein, all covenants and agreements herein contained by or on behalf of the
Borrower or the Lender shall be binding upon and inure to the benefit of the
Borrower or the Lender, as the case may be, and their respective heirs, legal
representatives, successors and assigns.

      10.5 Rights of Third Parties. All provisions herein are imposed solely and
exclusively for the benefit of the Lender and the Borrower. No other Person
shall have any right, benefit, priority or interest hereunder or as a result
hereof or have standing to require satisfaction of provisions hereof in
accordance with their terms, and any or all of such provisions may be freely
waived in whole or in part by the Lender at any time if in its sole discretion
it deems it advisable to do so.

                                       29
<PAGE>

      10.6 Articles and Sections. This Agreement, for convenience only, has been
divided into Articles and Sections and it is understood that the rights and
other legal relations of the parties hereto shall be determined from this
instrument as an entirety and without regard to the aforesaid division into
Articles and Sections and without regard to headings prefixed to such Articles
or Sections.

      10.7 Number and Gender. Whenever the context requires, reference herein
made to the single number shall be understood to include the plural; and
likewise, the plural shall be understood to include the singular. Definitions of
terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated. Words
denoting sex shall be construed to include the masculine, feminine and neuter,
when such construction is appropriate; and specific enumeration shall not
exclude the general but shall be construed as cumulative.

      10.8 Renewals and Extensions. All provisions of this Agreement relating to
the Notes shall apply with equal force and effect to each promissory note
hereafter executed or issued which in whole or in part represents a renewal or
extension of any part of the Indebtedness of the Borrower under this Agreement,
the Notes, or any other Loan Document.

      10.9 No Waiver: Rights Cumulative. No course of dealing on the part of the
Lender, its officers or employees, nor any failure or delay by the Lender with
respect to exercising any of its rights under any Loan Document shall operate as
a waiver thereof. The rights of the Lender under the Loan Documents shall be
cumulative and the exercise or partial exercise of any such right shall not
preclude the exercise of any other right. No Advance hereunder shall constitute
a waiver of any of the covenants, warranties or conditions of the Borrower
contained herein. In the event the Borrower are unable to satisfy any such
covenant, warranty or condition, no such Advance shall have the effect of
precluding the Lender from thereafter declaring such inability to be an Event of
Default if same constitutes an Event of Default under the terms of this
Agreement as hereinabove provided.

      10.10 Incorporation of Exhibits. The Exhibits attached to this Agreement
are incorporated herein and shall be considered a part of this Agreement for all
purposes.

      10.11 Survival Upon Unenforceability. In the event any one or more of the
provisions contained in any of the Loan Documents or in any other instrument
referred to herein or executed in connection with the Obligations shall, for any
reason, be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provision
of any Loan Document or of any other instrument referred to herein or executed
in connection with such Obligations.

      10.12 Amendments or Modifications. Neither this Agreement nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.

                                       30
<PAGE>

      10.13 Controlling Provision Upon Conflict. In the event of a conflict
between the provisions of this Agreement and those of any other Loan Document,
the provisions of this Agreement shall control.

      10.14 Time, Place and Method of Payments. All payments required pursuant
to this Agreement or the Notes shall be made in lawful money of the United
States of America and in immediately available funds; shall be deemed received
by the Lender on the next Business Day following receipt if such receipt is
after 2:00 p.m. Central Standard or Daylight Savings Time, as the case may be,
on any Business Day; and shall be made at the Principal Office of the Lender.
Except as provided to the contrary herein, if the due date of any payment
hereunder or under the Notes would otherwise fall on a day which is not a
Business Day, such date shall be extended to the next succeeding Business Day
and interest shall be payable for any principal so extended for the period of
such extension.

      10.15 Time of Essence. Time is of the essence of this Agreement and of
each provision hereof.

      10.16 Disposition of Collateral. Notwithstanding any term or provision,
express or implied, in any of the Security Instruments, the realization,
liquidation, foreclosure or any other disposition on or of any or all of the
Collateral shall be in the order and manner and determined in the sole
discretion of the Lender; provided however, that in no event shall the Lender
violate applicable Law or exercise rights and remedies other than those provided
in such Security Instruments or otherwise existing at law or in equity.

      10.17 GOVERNING LAW. THIS AGREEMENT, THE NOTES, AND THE GUARANTY SHALL BE
DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA.

      10.18 JURISDICTION AND VENUE. All actions or proceedings with respect to,
arising directly or indirectly in connection with, out of, related to or from
this Agreement or any other loan document may be litigated, at the sole
discretion and election of the Lender, in courts having situs in Oklahoma City,
Oklahoma County, Oklahoma. The Borrower hereby submits to the jurisdiction of
any local, state or federal court located in Oklahoma City, Oklahoma County,
Oklahoma and hereby waives any rights it may have to transfer or change the
jurisdiction or venue of any litigation brought against it by the Lender in
accordance with this section.

      10.19 WAIVER OF RIGHTS TO JURY TRIAL. The Borrower and the Lender hereby
knowingly, voluntarily, intentionally, irrevocably and unconditionally waive all
rights to trial by jury in any action, suit, proceeding, counterclaim or other
litigation that relates to or arises out of this Agreement or any other loan
document or otherwise with respect thereto. The provisions of this section are a
material inducement for the Lender entering into this Agreement.

                                       31
<PAGE>

      10.20 ENTIRE AGREEMENT. This Agreement constitutes the entire Agreement
among the parties hereto with respect to the parties hereof and shall supersede
any prior agreement between the parties hereto, whether written or oral,
relating to the subject hereof. Furthermore, in this regard, this written
Agreement and the other written loan documents represent, collectively, 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.

      IN WITNESS WHEREOF, this Agreement is deemed executed effective as of the
date first above written.

BORROWER:                      FORTUNE NATURAL RESOURCES COMPANY


                               /s/ Tyrone J. Fairbanks
                               ------------------------------------
                               By:     Tyrone J. Fairbanks
                               Title:  Chief Executive officer


LENDER:                        ENERQUEST OIL & GAS, L.L.C.


                               /s/ Gregory W. Olson
                               ------------------------------------
                               By:     Gregory W. Olson
                               Title:  President




                                       32
<PAGE>

                                    EXHIBITS


Exhibit A:        Advance Request


Exhibit B:        Borrowing Base (Lease Loan)


Exhibit C:        Compliance Certificate


Exhibit D-1:      Lease Note


Exhibit D-2       Reserve Note


Exhibit E:        Permitted Liens


Exhibit F         Borrowing Base (Reserve Loan)


Exhibit G         Reserve Amounts/Sales Proceeds


Exhibit H         Oil & Gas Property Descriptions


Exhibit I         Subordinated Note


Exhibit J         Warrant


Exhibit K         Bridge Notes




                                       33

</TEXT>
</DOCUMENT>
