PURCHASE AND SALE AGREEMENT

Purchase and Sale Agreement

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Storm Cat Energy CORP | PALO PETROLEUM, INC. | PASO GASO PIPELINE, LLC

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Title: PURCHASE AND SALE AGREEMENT
Governing Law: Wyoming Date: 7/5/2005

PURCHASE AND SALE AGREEMENT

PALO PETROLEUM, INC.
AND
PASO GASO PIPELINE, LLC, ET AL

AS SELLER
AND
STORM CAT ENERGY (USA) CORPORATION
AS BUYER

TABLE OF CONTENTS

ARTICLE I Assets

Section 1.01 Agreement to Sell and Purchase

Section 1.02 Assets

Section 1.03 Excluded Assets

ARTICLE II Purchase Price

Section 2.01 Purchase Price

Section 2.02 Deposit

Section 2.03 Allocated Values

ARTICLE III Effective Time

Section 3.01 Ownership of Assets

ARTICLE IV Title and Environmental Matters

Section 4.01 Examination Period

Section 4.02 Title Defects

Section 4.03 Notice of Title Defects

Section 4.04 Remedies for Title Defects

Section 4.05 Special Warranty of Title

Section 4.06 Preferential Rights To Purchase

Section 4.07 Consents to Assignment

Section 4.08 Environmental Review

Section 4.09 Environmental Definitions

Section 4.10 Notice of Environmental Defects

Section 4.11 Remedies for Environmental Defects

Section 4.12 Limitation of Remedies for Title and Environmental Defects

ARTICLE V Representations and Warranties of Seller

Section 5.01 Existence

Section 5.02 Legal Power

Section 5.03 Execution

Section 5.04 Brokers

Section 5.05 Bankruptcy

Section 5.06 Suits

Section 5.07 Royalties

Section 5.08 Taxes

Section 5.09 Contracts

Section 5.10 Environmental Matters

ARTICLE VI Representations and Warranties of Buyer

Section 6.01 Existence

Section 6.02 Legal Power

Section 6.03 Execution

(i)

Section 6.04 Brokers

Section 6.05 Bankruptcy

Section 6.06 Suits

Section 6.07 Qualifications

Section 6.08 Investment

Section 6.09 Funds

ARTICLE VII Operation of the Assets

Section 7.01 Operation of the Assets Prior to the Closing

Section 7.02 Operation of the Assets After the Closing

Section 7.03 Limitations on Liability of Operator

ARTICLE VIII Conditions to Obligations of Seller

Section 8.01 Representations

Section 8.02 Performance

Section 8.03 Pending Matters

Section 8.04 Purchase Price

Section 8.05 Execution and Delivery of the Closing Documents

ARTICLE IX Conditions to Obligations of Buyer

Section 9.01 Representations

Section 9.02 Performance

Section 9.03 Pending Matters

Section 9.04 Execution and Delivery of the Closing Documents

ARTICLE X The Closing

Section 10.01 Time and Place of the Closing

Section 10.02 Extension

Section 10.03 Adjustments to Purchase Price at the Closing

Section 10.04 Pre-Closing Allocations/Statement

Section 10.05 Post-Closing Adjustments to Purchase Price

Section 10.06 Transfer Taxes

Section 10.07 Ad Valorem and Similar Taxes

Section 10.08 Actions of Seller at the Closing

Section 10.09 Actions of Buyer at the Closing

Section 10.10 Further Cooperation

ARTICLE XI Termination

Section 11.01 Right of Termination

Section 11.02 Effect of Termination

Section 11.03 Attorneys' Fees, Etc

ARTICLE XII Obligations and Indemnification

Section 12.01 Retained Obligations

Section 12.02 Assumed Obligations

(ii)

Section 12.03 Buyer's Indemnification

Section 12.04 Seller's Indemnification - Third Party Non-environmental Claims

Section 12.05 Seller's Indemnification - Third Party Environmental Claims

Section 12.06 Notices and Defense of Indemnified Matters

ARTICLE XIII Limitations on Representations and Warranties

Section 13.01 Disclaimers of Representations and Warranties

Section 13.02 Survival

Section 13.03 Casualty Loss

ARTICLE XIV Dispute Resolution

Section 14.01 General

Section 14.02 Senior Management

Section 14.03 Disputes

ARTICLE XV Miscellaneous

Section 15.01 Names

Section 15.02 Taxes and Expenses

Section 15.03 Independent Investigation

Section 15.04 Document Retention

Section 15.05 Entire Agreement

Section 15.06 Waiver

Section 15.07 Publicity

Section 15.08 Construction

Section 15.09 No Third Party Beneficiaries

Section 15.10 Assignment

Section 15.11 Governing Law

Section 15.12 Notices

Section 15.13 Severability

Section 15.14 Time of the Essence

Section 15.15 Counterpart Execution

Section 15.16 Operatorship

Section 15.17 Tax Deferred Exchange

EXHIBITS AND SCHEDULES

Exhibit A -

Subject Interests

Exhibit A-1 -

Paso Gaso Pipeline, LLC System

Exhibit B

Wells and Interests and Allocated Values

Exhibit B-1-

Non-PDP Properties and Allocated Values

Exhibit C-

Assignment and Bill of Sale of Oil and Gas Properties

Exhibit C-1-

Assignment and Bill of Sale of Pipeline System

Schedule 1.02(f)-

Contracts

Schedule 1.03-

Excluded Assets

Schedule 10.03(c)-

Gas Imbalances

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this " Agreement ") is made and entered into this 18 ^`h day of January, 2005, by and between Palo Petroleum, Inc., a Texas corporation, Paso Gaso Pipeline, LLC, a Texas limited liability company, Mel McClung, Tonya McClung, Matt McClung, Airborne Investments, LP, a California limited partnership, the Bernell E. Snider & Flora Snider Community Property Trust, Kozell T. & Sally Cannon Boren as Co-Trustees of the Boren Community Property Trust, established April 6, 2001, Sosebee Property Company No. 2, Ltd., a Texas limited partnership, Double L&S, LLC, a California limited liability company, Don Farris and Irving Dreibrodt (hereinafter collectively referred to as " Seller "), and Storm Cat Energy (USA) Corporation, a Colorado corporation (" Buyer "). Buyer and Seller are collectively referred to herein as the " Parties ", and are sometimes referred to individually as a " Party ."

WITNESSETH:

WHEREAS, Seller is willing to sell to Buyer, and Buyer is willing to purchase from Seller, the Assets (as hereinafter defined), all upon the terms and conditions hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual benefits derived and to be derived from this Agreement by each Party, Seller and Buyer hereby agree as follows:

ARTICLE I
Assets

Section 1.01

Agreement to Sell and Purchase. Subject to and in accordance with the terms and conditions of this Agreement, Buyer agrees to purchase the Assets from Seller, and Seller agrees to sell the Assets to Buyer.

Section 1.02

Assets. Subject to Section 1.03, the term "Assets" shall mean all of Seller's right, title and interest in and to:

(a)

the leasehold estates in and to the oil, gas and mineral leases described or referred to in Exhibit A (the "Leases") and any overriding royalty interests in and to the lands covered by the Leases, assignments and other documents of title described or referred to in Exhibit A, all as more specifically described in Exhibit A (collectively, the "Subject Interests," or singularly, a "Subject Interest");

(b)

the Paso Gaso Pipeline LLC gathering facilities the ("System"), including Seller's interest in and to any and all real property owned by Seller and associated with the System, including, but not limited to, all fee lands, leases and easements on which the System and related pipeline and other facilities are located as further described on Exhibit A-1 attached hereto.

(c)

all rights incident to the Subject Interests, including, without limitation, (i) all rights with respect to the use and occupation of the surface of and the subsurface depths under the Subject Interests; (ii) all rights with respect to any pooled, communitized or unitized acreage by virtue of any Subject Interest being a part thereof, including all Hydrocarbon production after the Effective Time attributable to the Subject Interests or any such pool or unit allocated to any such Subject Interest;

(d)

all easements, rights-of-way, surface leases, servitudes, permits, licenses, franchises and other estates or similar rights and privileges directly related to or used solely in connection with the Subject Interests and the System ("Easements"), including, without limitation, the Easements described or referred to in Exhibits A and Al;

(e)

all personal property, equipment, fixtures, inventory and improvements located on or used in connection with the Subject Interests, the System and the Easements or with the production, treatment, sale, or disposal of oil, gas or other hydrocarbons (collectively, "Hydrocarbons"), byproducts or waste produced therefrom or attributable thereto, including, without limitation, all wells located on the lands covered by the Subject Interests or on lands with which the Subject Interests may have been pooled, communitized or unitized (whether producing, shut in or abandoned, and whether for production, injection or disposal), including, without limitation, the wells described in Exhibit B, wellhead equipment, pumps, pumping units, flowlines, gathering systems, piping, tanks, buildings, treatment facilities, injection facilities, disposal facilities, compression facilities, and other materials, supplies, equipment, facilities and machinery (collectively, "Personal Property");

(f)

to the extent assignable or transferable, all contracts, agreements and other arrangements that directly relate to the Subject Interests, the Leases, the System or the Easements, including, without limitation, production sales contracts, farmout agreements, operating agreements, service agreements and similar agreements, including, but not limited to, those listed on Schedule 1.02(f) (the "Contracts");

(g)

all books, records, files, muniments of title, reports and similar documents and materials that relate to the foregoing interests in the possession of, and maintained by, Seller (the "Records");

(h)

all geological and geophysical data including without limit, all such data in electronic form, relating to the Subject Interests, other than such data which cannot be transferred without the consent of or payment to any Third Party. For purposes of this Agreement, Third Party means any person or entity, governmental or otherwise, other than Seller or Buyer, and their respective Affiliates; the term includes, but is not limited to, working interest owners, royalty owners, lease operators, landowners, service contractors and governmental agencies; and

(i)

except for Excluded Assets, all other rights and interest in, to, under or derived from the Assets, even though the same may be improperly described in or omitted from the Exhibits. It is the express intent of the Parties that all of Seller's right, title and interest in and to any and all oil and gas properties described on Exhibits A, Al and B be assigned to Buyer hereunder.

Section 1.03

Excluded Assets. Notwithstanding the foregoing, the Assets shall not include, and there is excepted, reserved and excluded from the sale contemplated hereby (collectively, the "Excluded Assets"): (a) all credits and refunds and all accounts, instruments and general intangibles (as such terms are defined in the Wyoming Uniform Commercial Code) attributable to the Assets with respect to any period of time prior to the Effective Time; (b) all claims and causes of action of Seller (i) arising from acts, omissions or events, or damage to or destruction of property, occurring prior to the Effective Time, (ii) arising under or with respect to

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any of the Contracts that are attributable to periods of time prior to the Effective Time (including claims for adjustments or refunds), or (iii) with respect to any of the other Excluded Assets; (c) all rights and interests of Seller (i) under any policy or agreement of insurance or indemnity, (ii) under any bond, or (iii) to any insurance or condemnation proceeds or awards arising, in each case, from acts, omissions or events, or damage to or destruction of property, occurring prior to the Effective Time; (d) all Hydrocarbons produced from or attributable to the Subject Interests with respect to all periods prior to the Effective Time, together with all proceeds from the sale of such Hydrocarbons; (e) all claims of Seller for refunds of or loss carry forwards with respect to (i) ad valorem, severance production or any other taxes attributable to any time period prior to the Effective Time, (ii) income or franchise taxes, or (iii) any taxes attributable to the other Excluded Assets, and such other refunds, and rights thereto, for amounts paid in connection with the Assets and attributable to the period prior to the Effective Time, including refunds of amounts paid under any gas gathering or transportation agreement; (f) all amounts due or payable to Seller as adjustments to insurance premiums related to the Assets with respect to any period prior to the Effective Time; (g) all proceeds, income, revenues, costs, expenses and liabilities (and any security or other deposits made) attributable to (i) the Assets for any period prior to the Effective Time, or (ii) any other Excluded Assets; (h) all vehicles and certain equipment, supplies and office equipment as listed on Schedule 1.03; (i) all of Seller's proprietary computer software, technology, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property; (j) all of Seller's rights and interests in geological and geophysical data which cannot be transferred without the consent of or payment to any Third Party; (k) all documents and instruments of Seller that may be protected by an attorney-client privilege; (1) data and other information that cannot be disclosed or assigned to Buyer as a result of confidentiality or similar arrangements under agreements with persons unaffiliated with Seller; (m) all audit rights arising under any of the Contracts or otherwise with respect to any period prior to the Effective Time or to any of the other Excluded Assets; (n) all corporate, partnership, income tax and financial records of Seller; (o) all right, title and interest owned by Seller in the Subject Interests to the extent, and only to the extent, of a depth which is the deeper of 2,501 feet or greater below the surface of the ground or the base of the Fort Union Coal Formation; and (p) in addition to the foregoing, those items described on Schedule 1.03.

ARTICLE II

Purchase Price

Section 2.01

Purchase Price. The total consideration for the purchase, sale and conveyance of the Assets to Buyer is Buyer's payment to Seller of the sum of Eight Million Five Hundred Fifty Thousand Dollars ($8,550,000) (the "Purchase Price"), as adjusted in accordance with the provisions of this Agreement. The adjusted Purchase Price shall be paid to Seller (or its designee) at Closing (as hereinafter defined) by means of a completed federal funds transfer to an account designated in writing by Seller.

Section 2.02

Deposit.

(a)

Concurrently with the execution of this Agreement by Buyer and Seller, Buyer shall deliver to Seller a performance guarantee deposit in the amount of ten percent (10%) of the Purchase Price (the "Deposit"). The Deposit shall be paid by Buyer to Seller by means of a

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completed federal funds transfer to the account of Palo Petroleum, Inc. on behalf of Seller, Account No. 0054900528, at Compass Bank, ABA Routing Number 113010547.

(b)

If, on the Closing Date or thereafter, Buyer is in material breach of this Agreement and fails to close, Seller shall have the option to terminate this Agreement, in which case Seller shall retain the Deposit as liquidated damages on account of Buyer's failure to perform its obligations under this Agreement or Buyer's breach of any representation under this Agreement, which remedy shall be the sole and exclusive remedy available to Seller for Buyer's failure to perform or breach. Buyer and Seller acknowledge and agree that (i) Seller's actual damages upon the event of such a termination are difficult to ascertain with any certainty, (ii) that the Deposit is a reasonable estimate of such actual damages and (iii) such liquidated damages do not constitute a penalty.

(c)

If this Agreement is terminated by the mutual written agreement of Buyer and Seller, or if the Closing does not occur on or before the Closing Date, for any reason other than as set forth in Section 2.02(b), then Seller shall return the Deposit to Buyer in immediately available funds within three (3) business days after the event giving rise to such payment to Buyer. Buyer and Seller shall thereupon have the rights and obligations set forth elsewhere herein.

(d)

If the transactions contemplated by this Agreement are consummated, the Deposit shall be retained by Seller and shall be considered as prepayment of a portion of the Purchase Price, and the amount payable by Buyer at the Closing shall be reduced by the amount of the Deposit.

Section 2.03

Allocated Values. The Purchase Price is allocated among the Assets as set forth in Exhibits B and B-1 attached hereto (the "Allocated Values"). Seller and Buyer agree that the Allocated Values shall be used to compute any adjustments to the Purchase Price pursuant to the provisions of Article IV.

ARTICLE III

Effective Time

Section 3.01

Ownership of Assets. If the transactions contemplated hereby are consummated in accordance with the terms and provisions hereof, the ownership of the Assets shall be transferred from Seller to Buyer on the Closing Date, and effective as of 7:00 a.m. local time on January 1, 2005 (the "Effective Time").

ARTICLE IV
Title and Environmental Matters

Section 4.01

Examination Period. Following the execution date of this Agreement until 5:00 p.m., local time in Houston, Texas on the date twenty (20) days after the execution of this Agreement (the "Examination Period"), Seller shall permit Buyer and/or its representatives to examine, at all reasonable times, in Seller's offices, all abstracts of title, title opinions, title files, ownership maps, lease files, contract files, assignments, division orders, operating and accounting records and agreements pertaining to the Assets insofar as same may now be in

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existence and in the possession of Seller, subject to such restrictions on disclosure as may exist under confidentiality agreements or other agreements binding on Seller or such data.

Section 4.02

Title Defects. The term "Title Defect," as used in this Agreement, shall mean, subject to Section 4.03: (a) any encumbrance, encroachment, irregularity, defect in or objection to Seller's ownership of any Asset (expressly excluding Permitted Encumbrances, as hereinafter defined) that causes Seller not to have Defensible Title (as hereinafter defined) to such Asset; or (b) any default by Seller under a lease, farmout agreement or other contract or agreement that would (i) have a material adverse affect on the operation, value or use of such Asset, (ii) prevent or limit Seller from receiving the proceeds of production attributable to Seller's interest therein or (iii) result in cancellation of any portion of Seller's interest therein. For purposes of this Agreement, the term "Defensible Title" means, with respect to a given Asset, such ownership by Seller in such Asset that, subject to and except for the Permitted Encumbrances:

(a)

entitles Seller to receive not less than the percentage set forth in Exhibit B as Seller's "Net Revenue Interest" of all Hydrocarbons produced, saved and marketed from each well or unit as set forth in Exhibit B, all without reduction, suspension or termination of such interest throughout the productive life of such well, except as specifically set forth in Exhibit B and entitles Seller to receive not less than the percentages set forth in Exhibit B-1 as Seller's "Net Revenue Interest" in each of the Leases, without reduction, suspension or termination of such interest throughout the life of the Leases, except as specifically set forth in Exhibit B-l;

(b)

obligates Seller to bear not greater than the percentage set forth in Exhibit B as Seller's "Working Interest" of the costs and expenses relating to the maintenance, development and operation of each well or unit as set forth in Exhibit B, all without increase throughout the productive life of such well, except as specifically set forth in Exhibit B, and obligates Seller to bear not greater than the percentage set forth in Exhibit B-I as Seller's "Working Interest" of the costs and expenses relating to each of the Leases, all without increase throughout the life of the Leases, except as specifically set forth in Exhibit B-l;

(c)

entitles Seller to ownership of all the assets comprising the System, as set forth in Exhibits A-1 and B; and

(d)

is free and clear of all liens, encumbrances, taxes, judgments, and defects in title. Section 4.03

Notice of Title Defects.

(a)

If Buyer discovers any Title Defect affecting any Asset, Buyer shall notify Seller prior to the expiration of the Examination Period of such alleged Title Defect. To be effective, such notice must (i) be in writing, (ii) be received by Seller prior to the expiration of the Examination Period, (iii) describe the Title Defect in sufficient, specific detail (including any alleged variance in the Net Revenue Interest), (iv) identify the specific Asset or Assets affected by such Title Defect, and (v) include the value of such Title Defect as determined by Buyer. Any matters that may otherwise constitute Title Defects, but of which Seller has not been specifically notified by Buyer in accordance with the foregoing, shall be deemed to have been waived by Buyer for all purposes under this Agreement, however, the failure to notify Seller of an

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undiscovered Title Defect shall not act as a waiver of any breach of the Special Warranty included in the Assignment to be delivered at Closing.

(b)

Upon the receipt of such notice from Buyer, Seller shall have the option, but not the obligation, to (i) attempt to cure such Title Defect at any time prior to the Closing, (ii) exclude the affected Asset from the sale and reduce the Purchase Price by the allocated value of such affected Asset, or if acceptable to Buyer (iii) not take any action with respect to the alleged Title Defect and indemnify Buyer pursuant to Section 12.04 against all costs which Buyer may incur in connection with same.

(c) The value attributable to each Title Defect (the "Title Defect Value") that is asserted by Buyer in the Title Defect notices shall be determined based upon the criteria set forth below:

(i)

If the Title Defect is a lien upon any Asset, the Title Defect Value is the amount necessary to be paid to remove the lien from the affected Asset.

(ii)

If the Title Defect asserted is that the Net Revenue Interest attributable to any Lease, well or unit is less than that stated in Exhibits B and B-1, then the Title Defect Value is the product of the Allocated Value attributed to such Asset, multiplied by a fraction, the numerator of which is the difference between the Net Revenue Interest applicable thereto set forth in Exhibits B and B-1 and the actual Net Revenue Interest, and the denominator of which is the applicable Net Revenue Interest stated in Exhibits B and B-1.

(iii)

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

(iv)

If a Title Defect is not in effect or does not adversely affect an Asset throughout the entire productive life of such Asset, such fact shall be taken into account in determining the Title Defect Value.

(v)

The Title Defect Value of a Title Defect shall be determined without duplication of any costs or losses included in another Title Defect Value hereunder.

(vi)

Notwithstanding anything herein to the contrary, in no event shall a Title Defect Value exceed the Allocated Value of the wells, units or other Assets affected thereby.

(vii)

Such other factors as are reasonably necessary to make a proper evaluation.

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Section 4.04

Remedies for Title Defects.

(a)

With respect to each Title Defect that is not cured on or before the Closing, except as otherwise provided in this Section 4.04, the Purchase Price shall be reduced, subject to Section 4.13, by an amount equal to the Title Defect Value agreed upon in writing by Buyer and Seller acting reasonably.

(b)

If any Title Defect is in the nature of an unobtained consent to assignment or other restriction on assignability, the provisions of Section 4.07 shall apply.

(c)

If on or before Closing the Parties have not agreed upon the validity of any asserted Title Defect or have not agreed on the Title Defect Value attributable thereto and Seller has not elected to exclude the affected Subject Interest or to indemnify Buyer pursuant to Section 4.03(a), either Party shall have the right to elect to have the validity of such Title Defect and/or such Title Defect Value determined by an Independent Expert pursuant to Section 14.03. If the validity of any asserted Title Defect, or the Title Defect Value attributable thereto, is not determined before Closing, the Purchase Price paid at Closing shall be reduced by the Allocated Value of the Subject Interest affected by such disputed Title Defect or Title Defect Value and such Subject Interest shall be excluded from the Closing. Upon the final resolution of such dispute, the Subject Interest affected by the Title Defect shall be promptly assigned to Buyer for the amount withheld at Closing if the Defect is found not to be a Title Defect or the Property shall remain excluded if the Titled Defect is confirmed.

Section 4.05

Special Warranty of Title. The documents to be executed and delivered by Seller to Buyer, transferring title to the Assets as required hereby, including the Assignment and Bill of Sale attached hereto as Exhibits C and C-1 (the "Assignments"), shall provide for a special warranty of title, subject to the Permitted Encumbrances and the terms of this Agreement. The term "Permitted Encumbrances" shall mean any of the following matters to the extent the same are valid and subsisting and affect the Assets:

(a)

the Leases, and Contracts;

(b)

any (i) inchoate liens or charges constituting or securing the payment of expenses that were incurred incidental to the maintenance, development, production or operation of the Assets or for the purpose of developing, producing or processing Hydrocarbons therefrom or therein, and (ii) materialman's, mechanics', repairman's, employees', contractors', operators' liens or other similar liens or charges for liquidated amounts arising in the ordinary course of business (iii) that Seller has agreed to assume or pay pursuant to the terms hereof, or (iv) for which Seller is responsible for paying or releasing at the Closing;

(c)

any liens for taxes and assessments not yet delinquent or, if delinquent, that are being contested in good faith in the ordinary course of business and for which any Seller has agreed to pay pursuant to the terms hereof or which have been prorated pursuant to the terms hereof;

(d)

the terms, conditions, restrictions, exceptions, reservations, limitations and other matters contained in (including any liens or security interests created by law or reserved in oil

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and gas leases for royalty, bonus or rental, or created to secure compliance with the terms of) the agreements, instruments and documents that create or reserve to Seller its interest in the Assets;

(e)

any obligations or duties affecting the Assets to any municipality or public authority with respect to any franchise, grant, license or permit and all applicable laws, rules, regulations and orders of any Governmental Authority (as hereinafter defined);

(f)

any (i) easements, rights-of-way, servitudes, pet tits, surface leases and other rights in respect of surface operations, pipelines, grazing, hunting, lodging, canals, ditches, reservoirs or the like, and (ii) easements for streets, alleys, highways, pipelines, telephone lines, power lines, railways and other similar rights-of-way on, over or in respect of property owned or leased by Seller or over which Seller owns rights-of-way, easements, permits or licenses, to the extent that same do not materially interfere with the oil and gas operations to be conducted on the Assets;

(g)

all lessors' royalties, overriding royalties, net profits interests, carried interests, production payments, reversionary interests and other burdens on or deductions from the proceeds of production created or in existence as of the Effective Time, whether recorded or unrecorded, provided that such matters do not operate to reduce the Net Revenue Interests of Seller below those set forth in Exhibits B and B-1 or increase the Working Interests of Seller above those set forth in Exhibits B and B-1 without a corresponding increase in the Net Revenue Interests;

(h)

preferential rights to purchase or similar agreements with respect to which (i) waivers or consents are obtained from the appropriate parties for the transaction contemplated hereby, or (ii) required notices have been given for the transaction contemplated hereby to the holders of such rights and the appropriate period for asserting such rights has expired without an exercise of such rights;

(i)

required Third Party consents to assignments or similar agreements with respect to which (i) waivers or consents are obtained from the appropriate parties for the transaction contemplated hereby in Section 4.07, or (ii) required notices have been given for the transaction contemplated hereby to the holders of such rights and the appropriate period for asserting such rights has expired without an exercise of such rights;

(j)

all rights to consent by, required notices to, filings with, or other actions by Governmental Authorities in connection with the sale or conveyance of oil and gas leases or interests therein that are customarily obtained subsequent to such sale or conveyance;

(k)

production sales contracts; division orders; contracts for sale, purchase, exchange, refining or processing of Hydrocarbons; unitization and pooling designations, declarations, orders and agreements; operating agreements; agreements of development; area of mutual interest agreements; gas balancing or deferred production agreements; processing agreements; plant agreements; pipeline, gathering and transportation agreements; injection, repressuring and recycling agreements; carbon dioxide purchase or sale agreements; salt water or other disposal agreements; seismic or geophysical permits or agreements; and any and all other agreements that have terms that are ordinary and customary to the oil, gas, sulphur and other mineral exploration,

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development, processing or extraction business or in the business of processing of gas and gas condensate production for the extraction of products therefrom, to the extent the same do not reduce the Net Revenue Interests of Seller below those set forth in Exhibits B and B-1 or increase the Working Interests of Seller above those set forth in Exhibits B and B-1 without a corresponding increase in the Net Revenue Interest;

(l)

rights reserved to or vested in any Governmental Authority to control or regulate any of the Assets and the applicable laws, rules, and regulations of such Governmental Authorities; and

(m)

all title defects and title irregularities affecting the Assets which individually or in the aggregate (i) do not operate to (A) reduce the Net Revenue Interest of Seller, (B) increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interests of Seller, or (C) otherwise interfere materially with the operation, value or use of the Assets, or (ii) operate to increase the proportionate share of costs and expenses of leasehold operations attributable to or to be borne by the Working Interest of Seller, so long as there is a proportionate increase in Seller's Net Revenue Interest.

Section 4.06

Preferential Rights To Purchase. Seller shall use all reasonable efforts, but without any obligation to incur any cost or expense in connection therewith (other than de minimis amounts), to comply with all preferential right to purchase provisions relative to any Asset prior to Closing. Prior to the Closing, Seller shall notify Buyer of the existence of any preferential purchase rights and if any preferential purchase rights are exercised or if the requisite period has elapsed without said rights having been exercised. If a Third Party who has been offered an interest in any Asset pursuant to a preferential right to purchase elects prior to the Closing to purchase all or part of such Asset pursuant to the aforesaid offer, the interest or part thereof so affected will be eliminated from the Assets and the Purchase Price shall be reduced by the Allocated Value of such Asset as paid by such Third Party. Otherwise, the interest offered as aforesaid shall be conveyed to Buyer at the Closing subject to any preferential right to purchase of any Third Party for which notice has been given but the time period for response by the holder of such preferential right extends beyond the Closing and Buyer shall assume all duties, obligations and liabilities arising from such preferential right to purchase. Without limiting the foregoing, if any such Third Party elects to purchase all or a part of an interest in any Asset subject to a preferential right to purchase after the Closing Date, Buyer shall be obligated to convey said interest to such Third Party and shall be entitled to the consideration for the sale of such interest or part thereof.

Section 4.07

Consents to Assignment. Seller shall use all reasonable efforts to obtain all necessary consents from third parties to assign the Assets prior to Closing (other than governmental approvals that are customarily obtained after Closing) and Buyer shall assist Seller with such efforts. To the extent such consents are not obtained prior to Closing and would render the assignment of some or all of the Assets void or voidable or give rise to a claim for damages as a result of the failure to obtain such consent then such failure shall constitute a Title Defect as to that portion of the Assets affected thereby. In all other cases, such unobtained consents shall not constitute Title Defects.

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Section 4.08

Environmental Review.

(a)

Buyer shall have the right to conduct or cause a consultant ("Buyer's Environmental Consultant") to conduct an environmental review of the Assets prior to the expiration of the Examination Period ("Buyer's Environmental Review"). The cost and expense of Buyer's Environmental Review, if any, shall be borne solely by Buyer. The scope of work comprising Buyer's Environmental Review shall be limited to that mutually agreed in writing by Buyer and Seller prior to commencement thereof and shall not include any intrusive test or procedure without the prior written consent of Seller. Buyer shall (and shall cause Buyer's Environmental Consultant to): (i) consult with Seller before conducting any work comprising Buyer's Environmental Review, (ii) perform all such work in a safe and workmanlike manner and so as to not unreasonably interfere with Seller's operations, and (iii) comply with all applicable laws, rules, and regulations. Buyer shall be solely responsible for obtaining any Third Party consents that are required in order to perform any work comprising Buyer's Environmental Review, and Buyer shall consult with Seller prior to requesting each such Third Party consent. Seller shall have the right to have a representative or representatives accompany Buyer and Buyer's Environmental Consultant at all times during Buyer's Environmental Review, and Buyer shall give Seller notice not more than five (5) days and not less than 48 hours before any visits by Buyer or Buyer's Environmental Consultant to the Assets. With respect to any samples taken in connection with Buyer's Environmental Review, Buyer shall take split samples, providing one of each such sample, properly labeled and identified, to Seller. Buyer hereby agrees to release, defend, indemnify and hold harmless Seller from and against all claims, losses, damages, costs, expenses, causes of action and judgments of any kind or character arising out of or relating to Buyer's Environmental Review.

(b)

Unless otherwise required by applicable law, Buyer shall (and shall cause Buyer's Environmental Consultant to) treat confidentially any matters revealed by Buyer's Environmental Review and any reports or data generated from such review (the "Environmental Information"), and Buyer shall not (and shall cause Buyer's Environmental Consultant to not) disclose any Environmental Information to any Governmental Authority or other Third Party without the prior written consent of Seller. Unless otherwise required by law, Buyer may use the Environmental Information only in connection with the transactions contemplated by this Agreement. If Buyer, Buyer's Environmental Consultant, or any Third Party to whom Buyer has provided any Environmental Information become legally compelled to disclose any of the Environmental Information, Buyer shall provide Seller with prompt notice sufficiently prior to any such disclosure so as to allow Seller to file any protective order, or seek any other remedy, as it deems appropriate under the circumstances. If this Agreement is terminated prior to the Closing, Buyer shall deliver the Environmental Information to Seller, which Environmental Information shall become the sole property of Seller. Buyer shall provide copies of the Environmental Information to Seller without charge.

Section 4.09

Environmental Definitions.

(a)

Environmental Defects. For purposes of this Agreement, the term "Environmental Defect" shall mean, with respect to any given Asset, an individual environmental condition that constitutes a violation of Environmental Laws in effect as of the date of this Agreement in the jurisdiction in which such Asset is located.

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(b) Governmental Authority. For purposes of this Agreement, the term "Governmental Authority" shall mean, as to any given Asset, the United States and the state, county, city and political subdivisions in which such Asset is located and that exercises jurisdiction over such Asset, and any agency, department, board or other instrumentality thereof that exercises jurisdiction over such Asset.

(c)

Environmental Laws. For purposes of this Agreement, the term "Environmental Laws" shall mean all laws, statutes, ordinances, court decisions, rules and regulations of any Governmental Authority pertaining to health or the environment as may be interpreted by applicable court decisions or administrative orders, including, without limitation, the Clean Air Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act, as amended ("CERCLA"), the Federal Water Pollution Control Act, as amended, the Occupational Safety and Health Act, as amended, the Resources Conservation and Recovery Act, as amended, the Safe Drinking Water Act, as amended, the Toxic Substances Control Act, as amended, the Superfund Amendment and Reauthorization Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended, and comparable state and local laws.

(d)

Environmental Defect Value. For purposes of this Agreement, the term "Environmental Defect Value" shall mean, with respect to any Environmental Defect, the value, as of the Closing Date, of the estimated costs and expenses to correct such Environmental Defect in the most cost effective manner reasonably available, consistent with Environmental Laws, taking into account that non-permanent remedies (such as mechanisms to contain or stabilize hazardous materials, including monitoring site conditions, natural attenuation, risk-based corrective action, institutional controls or other appropriate restrictions on the use of property, caps, dikes, encapsulation, leachate collection systems, etc.) may be the most cost effective manner reasonably available. In no event shall the Environmental Defect Value exceed the Allocated Value of the Asset(s) affected thereby.

Section 4.10

Notice of Environmental Defects _, . If Buyer discovers any Environmental Defect affecting the Assets, Buyer shall notify Seller prior to the expiration of the Examination Period of such alleged Environmental Defect. To be effective, such notice must (i) be in writing, (ii) be received by Seller prior to the expiration of the Examination Period, (iii) describe the Environmental Defect in sufficient, specific detail, including, without limitation, (A) the written conclusion of Buyer's Environmental Consultants that an Environmental Defect exists, which conclusion shall be reasonably substantiated by the factual data gathered in Buyer's Environmental Review, including, without limitation, maps, reports, boring logs and field notes prepared in connection with the Environmental Review, if any, and (B) a general citation of the provisions of Environmental Laws alleged to be violated and the related facts that substantiate such violation, (iv) identify the specific Assets affected by such Environmental Defect, (v) the procedures recommended to correct the Environmental Defect, together with any related recommendations from Buyer's Environmental Consultant, and (vi) Buyer's estimate of the Environmental Defect Value, including the basis for such estimate. Any matters that may otherwise constitute Environmental Defects, but of which Seller has not been specifically notified by Buyer in accordance with the foregoing, together with any environmental matter that does not constitute an Environmental Defect, shall be deemed to have been waived by Buyer for all purposes and constitute an Assumed Obligation. Upon the receipt of such effective notice from Buyer, Seller shall have the option, but not the obligation, to (i) attempt to cure such

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Environmental Defect at any time prior to the Closing, (ii) exclude the affected Asset from the sale and reduce the Purchase Price by the allocated value of such affected Asset, or (iii) not take any remedial action with respect to the alleged Environmental Defect and, if acceptable to Buyer, indemnify Buyer pursuant to Section 12.05 against all costs which Buyer may incur in connection with same.

Section 4.11

Remedies for Environmental Defects.

(a)

If any Environmental Defect described in a notice delivered in accordance with Section 4.11 is not cured on or before the Closing and Seller has not elected to indemnify Buyer pursuant to Section 4.10, then the Purchase Price shall be reduced, subject to Section 4.13, by the Environmental Defect Value of such Environmental Defect as agreed by the Parties acting reasonably.

(b)

If Buyer and Seller have not agreed as to the validity of any asserted Environmental Defect, or if the Parties have not agreed on the Environmental Defect Value therefor, on or before three (3) business days prior to the Closing Date Seller shall be entitled to (i) exclude such Affected Property from the Assets and shall proceed to Closing reducing the Purchase Price by the Allocated Value of such excluded Asset, or, if Buyer agrees (ii) indemnify Buyer pursuant to Section 4.10 and proceed to Closing without excluding such Affected Property from the Assets and without reducing the Purchase Price by the Allocated Value of such affected Asset.

Section 4.12 Limitation of Remedies for Title and Environmental Defects.

Notwithstanding anything to the contrary contained in Section 4.04 or 4.1, if the value of the aggregate Title Defects, as determined herein, does not exceed $100,000, or if the value of the aggregate Environmental Defects, as determined pursuant to Section 4.11 or Section 14.03, does not exceed $100,000, then no adjustment to the Purchase Price shall be made for such Title Defects or Environmental Defects.

ARTICLE V
Representations and Warranties of Seller

Each respective Seller represents and warrants to Buyer for its own behalf and not jointly and severally that:

Section 5.01

Existence. To the extent a party identified as a Seller in the introductory paragraph of this Agreement is a corporation or partnership, it is duly organized and validly existing under the laws of the state set forth in such introductory paragraph for such entity. Such Sellers have full legal power, right and authority to carry on its business as such is now being conducted and as contemplated to be conducted.

Section 5.02

Legal Power. Seller has the legal power and right to enter into and perform this Agreement and the transactions contemplated hereby. The consummation of the transactions contemplated by this Agreement will not violate, nor be in conflict with:

(a) any provision of any individual Seller's articles of incorporation, by-laws,
agreement of limited partnership or other governing documents;

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(b)

except for any preferential purchase rights and consents to assignment, any material agreement or instrument to which Seller is a party or by which Seller is bound; or

(c)

any judgment, order, ruling or decree applicable to Seller as a party in interest or any law, rule or regulation applicable to Seller.

Section 5.03

Execution. The execution, delivery and performance of this Agreement and the transactions contemplated hereby are duly and validly authorized by all requisite partnership action on the part of Seller. This Agreement constitutes the legal, valid and binding obligation of Seller enforceable in accordance with its terms.

Section 5.04

Brokers. Tristone Capital Co. has acted for or on behalf of Seller or any affiliate of Seller in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Seller or any affiliate of Seller for which Buyer has or will have any liabilities or obligations (contingent or otherwise).

Section 5.05

Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or to the knowledge of Seller threatened against Seller.

Section 5.06

Suits. There is no suit, action, claim, investigation or inquiry by any person or entity or by any administrative agency or Governmental Authority and no legal, administrative or arbitration proceeding pending or, to Seller's knowledge, threatened against Seller or any affiliate of Seller or the Assets that has materially affected or will materially affect Seller's ability to consummate the transactions contemplated herein or materially affect the title to or value of the Assets.

Section 5.07

Royalties. To Seller's knowledge, all Leases are in full force and effect and all rentals, royalties and other payments due under the Subject Interests described in Exhibit A have been paid in all material respects, except those amounts in suspense.

Section 5.08

Taxes. All ad valorem, property, production, severance, excise and similar taxes and assessments based on or measured by the ownership of the Assets or the production of Hydrocarbons or the receipt of proceeds therefrom that have become due and payable have been paid in all material respects.

Section 5.09

Contracts. To Seller's knowledge, all material Contracts (i) are in full force and effect, and (ii) Seller is not in default with respect to any of its material obligations thereunder.

Section 5.10

Environmental Matters. To Seller's knowledge, Seller is not in violation of any Environmental Laws applicable to the Assets. No notice alleging such violation is pending or threatened against the Assets.

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ARTICLE VI
Representations and Warranties of Buyer

Buyer represents and warrants to Seller that:

Section 6.01

Existence. Buyer is a corporation duly organized and validly existing under the laws of Colorado and is qualified to conduct business in the State of Wyoming. Buyer has full legal power, right and authority to carry on its business as such is now being conducted and as contemplated to be conducted.

Section 6.02

Legal Power. Buyer has the legal power and right to enter into and perform this Agreement and the transactions contemplated hereby. The consummation of the transactions contemplated by this Agreement will not violate, nor be in conflict with:

(a)

any provision of Buyer's charter or other governing documents;

(b)

any material agreement or instrument to which Buyer is a party or by which Buyer is bound; or

(c)

any judgment, order, ruling or decree applicable to Buyer as a party in interest or any law, rule or regulation applicable to Buyer.

Section 6.03

Execution. The execution, delivery and performance of this Agreement and the transactions contemplated hereby are duly and validly authorized by all requisite [partnership] action on the part of Buyer. This Agreement constitutes the legal, valid and binding obligation of Buyer enforceable in accordance with its terms.

Section 6.04

Brokers. No broker or finder has acted for or on behalf of Buyer or any affiliate of Buyer in connection with this Agreement or the transactions contemplated by this Agreement. No broker or finder is entitled to any brokerage or finder's fee, or to any commission, based in any way on agreements, arrangements or understandings made by or on behalf of Buyer or any affiliate of Buyer for which Seller has or will have any liabilities or obligations (contingent or otherwise).

Section 6.05

Bankruptcy. There are no bankruptcy, reorganization or arrangement proceedings pending, being contemplated by or to the knowledge of Buyer threatened against Buyer or any affiliate of Buyer.

Section 6.06

Suits. There is no suit, action, claim, investigation or inquiry by any person or entity or by any administrative agency or Governmental Authority and no legal, administrative or arbitration proceeding pending or, to Buyer's knowledge, threatened against Buyer or any affiliate of Buyer that has materially affected or will materially affect Buyer's ability to consummate the transactions contemplated herein.

Section 6.07

Qualifications. Buyer is now, and after the Closing shall continue to be, qualified with all applicable Governmental Authorities to own and operate the Assets and has, and shall maintain, all necessary bonds to own and operate the Assets.

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Section 6.08

Investment. Prior to entering into this Agreement, Buyer was advised by and has relied solely on its own legal, tax and other professional counsel concerning this Agreement, the Assets and the value thereof. Buyer is acquiring the Assets for its own account and not for distribution or resale in any manner that would violate any state or federal securities law, rule, regulation or order. Buyer understands and acknowledges that if any of the Assets were held to be securities, they would be restricted securities and could not be transferred without registration under applicable state and federal securities laws or the availability of an exemption from such registration.

Section 6.09

Funds. Buyer has arranged to have available by the Closing Date sufficient funds to enable Buyer to pay in full the Purchase Price as herein provided and otherwise to perform its obligations under this Agreement.

ARTICLE VII
Operation of the Assets

Section 7.01

Operation of the Assets Prior to the Closing.

(a)

From and after the date of execution of this Agreement and until the Closing, and subject to the provisions of applicable operating and other agreements, Seller shall use all reasonable efforts to operate the Assets and use its reasonable efforts to cause any other operators to operate and administer the Assets in a manner consistent with its past practices, and shall carry on its business with respect to the Assets in substantially the same manner as before execution of this Agreement.

(b)

Buyer acknowledges that Seller owns undivided interests in some or all of the Assets, and Buyer agrees that the acts or omissions of the other working interests owners shall not constitute a violation of the provisions of this Article VII, nor shall any action required by a vote of working interest owners constitute such a violation so long as Seller has voted its interests in a manner that complies with the provisions of this Article VII. To the extent that Seller is not the operator of any of the Assets, the obligations of Seller in this Article VII shall be construed to require that Seller use reasonable efforts (without being obligated to incur any expense or institute any cause of action) to cause the operator of such Assets to take such actions or render such performance within the constraints of the applicable operating agreements and other applicable agreements.

Section 7.02

Operation of the Assets After the Closing. It is expressly understood and agreed that Seller shall not be obligated to continue operating any of the Assets following the Closing and Buyer hereby assumes full responsibility for operating (or causing the operation of) all Assets following the Closing. Seller shall make its personnel available to Buyer prior to the Closing as may be reasonably necessary to assist in the transition if Buyer becomes the operator. Seller does not warrant or guarantee that Buyer will become the operator of the Assets or any portion thereof, as such matter will be controlled by the applicable joint operating agreement(s) however, Seller shall use its reasonable efforts to assist Buyer in becoming successor operator of the Subject Interests. Without implying any obligation on Seller's part to continue operating any Assets after the Closing, if Seller elects to continue to operate any Assets following the Closing at the request of Buyer or any Third Party working interest owner, due to constraints of

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applicable joint operating agreement(s), failure of a successor operator to take over operations or other reasonable cause, such continued operation by Seller shall be for the account of Buyer, at the sole risk, cost and expense of Buyer. Seller, as a part of the Assumed Obligations, is hereby released and indemnified by Buyer from all claims, losses, damages, costs, expenses, causes of action and judgments of any kind or character related to the election of a successor operator. Buyer shall conduct or cause to be conducted all operations on the Assets after Closing in a good and workmanlike manner and in compliance with all applicable laws, rules, regulations and agreements. Buyer acknowledges that Steve Moore, Frank Brown, William Bowen, Dustin Brown, Frances Brown and Russell Elliott (the "Employees") are currently employed in connection with the Assets and that after Closing Buyer agrees that it shall offer employment to the Employees as independent contractors on substantially the same salary as such Employees are presently employed for a period of time not less than sixty (60) days following Closing.

Section 7.03

Limitations on Liability of Operator. Notwithstanding anything to the contrary in this Article VII, Seller shall have no liability to Buyer for, and Buyer hereby agrees to release, defend, indemnify and hold harmless Seller from, the incorrect payment of delay rentals, royalties, shut-in royalties or similar payments or for any failure to pay any such payments through mistake or oversight provided that such payments relate to production months after the Effective Time. In no event shall Buyer's remedy for any Seller's breach of its obligations under this Article VII exceed the Allocated Value of the Subject Interest affected by such breach.

ARTICLE VIII
Conditions to Obligations of Seller

The obligations of Seller to consummate the transaction provided for herein are subject, at the option of Seller, to the fulfillment on or prior to the Closing Date of each of the following conditions:

Section 8.01

Representations. The representations and warranties of Buyer herein contained shall be true and correct in all material respects on the Closing Date as though made on and as of such date.

Section 8.02

Performance. Buyer shall have performed all material obligations, covenants and agreements contained in this Agreement to be performed or complied with by it at or prior to the Closing.

Section 8.03

Pending Matters. No suit, action or other proceeding shall be pending or threatened that seeks to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement.

Section 8.04

Purchase Price. Buyer shall have delivered to Seller the Purchase Price, as the same may be adjusted hereunder, in accordance with the provisions of Article II.

Section 8.05

Execution and Delivery of the Closing Documents. Buyer shall have executed, acknowledged and delivered, as appropriate, to Seller all closing documents described in Section 10.09.

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ARTICLE IX
Conditions to Obligations of Buyer

The obligations of Buyer to consummate the transaction provided for herein are subject, at the option of Buyer, to the fulfillment on or prior to the Closing Date of each of the following conditions:

Section 9.01

Representations. The representations and warranties of Seller herein contained shall be true and correct in all material respects on the Closing Date as though made on and as of such date.

Section 9.02

Performance _, . Seller shall have performed all material obligations, covenants and agreements contained in this Agreement to be performed or complied with by them at or prior to the Closing.

Section 9.03

Pending Matters. No suit, action or other proceeding shall be pending or threatened that seeks to restrain, enjoin, or otherwise prohibit the consummation of the transactions contemplated by this Agreement.

Section 9.04

Execution and Delivery of the Closing Documents. Seller shall have executed, acknowledged and delivered, as appropriate, to Buyer all closing documents described in Section 10.08.

ARTICLE X

The Closing

Section 10.01

Time and Place of the Closing. If the conditions referred to in Articles VIII and IX of this Agreement have been satisfied or waived in writing, and subject to any extensions pursuant to Section 10.02, the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Palo Petroleum, Inc., whose address is 5944 Luther Lane, Suite 900, Dallas, Texas 75225, or at such place designated by Seller on February 28, 2005, as such date may be extended pursuant to Section 10.02 (the "Closing Date").

Section 10.02

Extension. The Closing Date may be extended by mutual written agreement of the Parties.

Section 10.03

Adjustments to Purchase Price at the Closing.

(a)

At the Closing, the Purchase Price shall be increased by the following amounts:

(i)

the amount as of the Effective Time of all prepaid ad valorem, property or similar taxes and asse

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