10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                        

Commission file number 1-33249

Legacy Reserves LP

(Exact name of registrant as specified in its charter)

Delaware	16-1751069
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
303 W. Wall, Suite 1400 Midland, Texas	79701
(Address of principal executive offices)	(Zip code)

(432) 689-5200

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes  o  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, or a non-accelerated filer. See definition of “accelerated filer and larger accelerated filer” in Rule 12b-2 of the Exchange Act.:

o Large accelerated filer o Accelerated filer x Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes  x No

29,708,965 units representing limited partner interests in the registrant were outstanding as of November 9, 2007.

TABLE OF CONTENTS

		Page
Glossary of Terms		3
Part I - Financial Information
Item 1.	Financial Statements.
	Condensed Consolidated Balance Sheets as of December 31, 2006 and September 30, 2007 (Unaudited)	6
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2007 (Unaudited)	8
	Condensed Consolidated Statement of Unitholders' Equity for the nine months ended September 30, 2007 (Unaudited)	9
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2007 (Unaudited)	10
	Notes to Condensed Consolidated Financial Statements (Unaudited)	12
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	33
Item 4.	Controls and Procedures.	34
Part II - Other Information
Item 1.	Legal Proceedings.	34
Item 1A.	Risk Factors.	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	34
Item 3.	Defaults Upon Senior Securities.	35
Item 4.	Submission of Matters to a Vote of Security Holders.	35
Item 5.	Other Information.	35
Item 6.	Exhibits.	37

Page 2

GLOSSARY OF TERMS

Bbl.  One stock tank barrel or 42 U.S. gallons liquid volume.

Bcf.  Billion cubic feet.

Boe.  One barrel of oil equivalent, determined using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Boe/d.  Barrels of oil equivalent per day.

Btu.  British thermal unit, which is the heat required to raise the temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.

Developed acreage.  The number of acres that are allocated or assignable to productive wells or wells capable of production.

Development well.  A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.

Dry hole or well.  A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production would exceed production expenses and taxes.

Exploitation.  A drilling or other project which may target proven or unproven reserves (such as probable or possible reserves), but which generally has a lower risk than that associated with exploration projects.

Field.  An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.

Gross acres or gross wells.  The total acres or wells, as the case may be, in which a working interest is owned.

MBbls.  One thousand barrels of crude oil or other liquid hydrocarbons.

MBoe.  One thousand barrels of crude oil equivalent, using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

Mcf.  One thousand cubic feet.

MMBbls.  One million barrels of crude oil or other liquid hydrocarbons.

MMBoe.  One million barrels of crude oil equivalent, using a ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.

MMBtu.  One million British thermal units.

MMcf.  One million cubic feet.

Net acres or net wells.  The sum of the fractional working interests owned in gross acres or gross wells, as the case may be.

NGLs or natural gas liquids.  The combination of ethane, propane, butane and natural gasolines that when removed from natural gas become liquid under various levels of higher pressure and lower temperature.

NYMEX.  New York Mercantile Exchange.

Page 3

Oil.  Crude oil, condensate and natural gas liquids.

Productive well.  A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceeds production expenses and taxes.

Proved developed reserves.  Reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and natural gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included in “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved developed non-producing or PDN’s.  Proved oil and natural gas reserves that are developed behind pipe, shut-in or can be recovered through improved recovery only after the necessary equipment has been installed, or when the costs to do so are relatively minor. Shut-in reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not started producing, (2) wells that were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe reserves are expected to be recovered from zones in existing wells that will require additional completion work or future recompletion prior to the start of production.

Proved reserves.  Proved oil and natural gas reserves are the estimated quantities of natural gas, crude oil and natural gas liquids that geological and engineering data demonstrates with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based on future conditions.

Proved undeveloped drilling location.  A site on which a development well can be drilled consistent with spacing rules for purposes of recovering proved undeveloped reserves.

Proved undeveloped reserves or PUDs.  Proved oil and natural gas reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

Recompletion.  The completion for production of an existing wellbore in another formation from that which the well has been previously completed.

Reserve acquisition cost.  The total consideration paid for an oil and natural gas property or set of properties, which includes the cash purchase price and any value ascribed to units issued to a seller adjusted for any post-closing items.

R/P ratio (reserve life).  The reserves as of the end of a period divided by the production volumes for the same period.

Reserve replacement.  The replacement of oil and natural gas produced with reserve additions from acquisitions, reserve additions and reserve revisions.

Reserve replacement cost.  An amount per Boe equal to the sum of costs incurred relating to oil and natural gas property acquisition, exploitation, development and exploration activities (as reflected in our year-end financial statements for the relevant year) divided by the sum of all additions and revisions to estimated proved reserves, including reserve purchases. The calculation of reserve additions for each year is based upon the reserve report of our independent engineers. Management uses reserve replacement cost to compare our company to others in terms of our historical ability to increase our reserve base in an economic manner. However, past performance does not necessarily reflect future reserve replacement cost performance. For example, increases in oil and natural gas prices in recent years have increased the economic life of reserves adding additional reserves with no required capital expenditures. On the other hand, increases in oil and natural gas prices have

Page 4

 increased the cost of reserve purchases and reserves added through exploitation. The reserve replacement cost may not be indicative of the economic value added of the reserves due to differing lease operating expenses per barrel and differing timing of production.

Reservoir.  A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reserves.

Standardized measure.  The present value of estimated future net revenues to be generated from the production of proved reserves, determined in accordance with assumptions required by the Financial Accounting Standards Board and the Securities and Exchange Commission (using prices and costs in effect as of the period end date) without giving effect to non-property related expenses such as general and administrative expenses, debt service and future income tax expenses or to depreciation, depletion and amortization and discounted using an annual discount rate of 10%. Because we are a limited partnership that allocates our taxable income to our unitholders, no provisions for federal or state income taxes have been provided for in the calculation of standardized measure. Standardized measure does not give effect to derivative transactions.

Undeveloped acreage.  Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas regardless of whether such acreage contains proved reserves.

Working interest.  The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and a share of production.

Workover.  Operations on a producing well to restore or increase production.

Page 5

Part I – FINANCIAL INFORMATION

Item 1.  Financial Statements.

 

LEGACY RESERVES LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
	December 31,			September 30,
	2006			2007
Current assets:
Cash and cash equivalents	$	1,061,852		$	4,358,522
Accounts receivable, net:
Oil and natural gas		7,599,915			12,596,594
Joint interest owners		4,345,334			3,650,636
Affiliated entities and other (Note 4)		21,336			9,907
Fair value of derivatives (Note 6)		5,102,083			301,534
Prepaid expenses and other current assets		90,609			649,654
Total current assets		18,221,129			21,566,847
Oil and natural gas properties, at cost:
Proved oil and natural gas properties, at cost, using the
successful efforts method of accounting:		289,518,708			406,356,304
Unproved properties		68,275			78,025
Accumulated depletion, depreciation and amortization		(42,006,485	)		(61,373,332	)
		247,580,498			345,060,997
Other property and equipment, net of accumulated depreciaton and
amortization of $51,108 and $177,166, respectively		303,750			679,495
Deposits on pending acquisitions		-			4,637,644
Operating rights, net of amortization of $295,314 and $724,942,
respectively		6,721,358			6,291,730
Fair value of derivatives (Note 6)		-			25,293
Other assets, net of amortization of $167,179 and $306,883, respectively		541,743			738,235
Investment in equity method investee (Note 3)		-			86,731
Total assets	$	273,368,478		$	379,086,972
See accompanying notes to condensed consolidated financial statements.

Page 6

 

LEGACY RESERVES LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND UNITHOLDERS' EQUITY
	December 31,		September 30,
	2006		2007
Current liabilities:
Accounts payable	$	2,931,627	$	681,293
Accrued oil and natural gas liabilities		5,881,612		8,566,783
Fair value of derivatives (Note 6)		-		8,124,905
Asset retirement obligation (Note 7)		553,579		470,518
Other (Note 9)		1,466,693		2,882,551
Total current liabilities		10,833,511		20,726,050
Long-term debt (Note 2)		115,800,000		93,000,000
Asset retirement obligation (Note 7)		5,939,201		7,045,527
Fair value of derivatives (Note 6)		2,006,547		13,768,328
Total liabilities		134,579,259		134,539,905
Commitments and contingencies (Note 5)
Unitholders' equity:
Limited partners' equity - 18,395,233 and 26,021,518 units issued
and outstanding at December 31, 2006 and September 30, 2007, respectively		138,653,452		244,440,705
General partner's equity (approximately 0.1%)		135,767		106,362
Total unitholders' equity		138,789,219		244,547,067
Total liabilities and unitholders' equity	$	273,368,478	$	379,086,972
See accompanying notes to condensed consolidated financial statements.

 

Page 7

LEGACY RESERVES LP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
			Three Months Ended						Nine Months Ended
			September 30,						September 30,
			2006			2007			2006			2007
Revenues:
Oil sales			$	13,204,380		$	22,441,858		$	32,443,950		$	51,396,169
Natural gas liquid sales				-			1,713,657			-			2,890,994
Natural gas sales				4,238,937			5,240,788			10,822,193			13,776,326
Realized and unrealized gain (loss) on oil and natural gas swaps (Note 6)				18,605,638			(6,435,752	)		5,533,553			(20,151,656	)
	Total revenues			36,048,955			22,960,551			48,799,696			47,911,833
Expenses:
Oil and natural gas production				4,166,766			7,580,473			10,159,887			18,408,152
Production and other taxes				1,029,511			1,886,122			2,710,392			4,360,881
General and administrative				1,186,884			1,443,190			3,265,163			6,039,371
Depletion, depreciation, amortization and accretion				5,346,432			6,959,351			12,701,726			19,065,064
Impairment of long-lived assets				8,572,859			950,174			8,572,859			1,229,874
Loss on disposal of assets				-			156,240			-			387,373
	Total expenses			20,302,452			18,975,550			37,410,027			49,490,715
	Operating income (loss)			15,746,503			3,985,001			11,389,669			(1,578,882	)
Other income (expense):
Interest income				55,226			54,284			93,659			205,443
Interest expense (Notes 2 and 6)				(1,857,331	)		(1,905,234	)		(4,511,679	)		(3,423,286	)
Equity in income (loss) of partnerships				-			29,690			(317,788	)		40,600
Other				-			-			14,910			1,013
	Net income (loss)		$	13,944,398		$	2,163,741		$	6,668,771		$	(4,755,112	)
	Net income (loss) per unit - basic and diluted (Note 8)		$	0.76		$	0.08		$	0.42		$	(0.19	)
	Weighted average number of units used in computing
		net income (loss) per unit -
		basic		18,386,817			26,021,518			15,952,509			25,492,521
		diluted		18,386,817			26,072,886			15,952,509			25,492,521
See accompanying notes to condensed consolidated financial statements.

 

Page 8

LEGACY RESERVES LP
CONDENSED CONSOLIDATED STATEMENT OF UNITHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007
(UNAUDITED)
									Total
	Number of		Limited			General			Unitholders'
	Limited Partner Units		Partner			Partner			Equity
Balance, December 31, 2006		18,395,233	$	138,653,452		$	135,767		$	138,789,219
Net proceeds from initial public
equity offering		6,900,000		121,554,464			-			121,554,464
Compensation expense on restricted
unit awards issued to employees		-		255,492			-			255,492
Vesting of Restricted Units		20,038		-			-			-
Units issued to Greg McCabe
in exchange for oil and
natural gas properties		95,000		2,270,500			-			2,270,500
Units issued to Nielson & Associates, Inc.
in exchange for oil and
natural gas properties		611,247		15,751,835			-			15,751,835
Reclass prior period compensation cost
on unit options granted to employees
to adjust for conversion to liability method
as described in FAS 123-R		-		(115,199	)		(115	)		(115,314	)
Distributions to unitholders, $1.24 per unit		-		(29,178,070	)		(25,947	)		(29,204,017	)
Net loss		-		(4,751,769	)		(3,343	)		(4,755,112	)
Balance, September 30, 2007		26,021,518	$	244,440,705		$	106,362		$	244,547,067
See accompanying notes to condensed consolidated financial statements.

Page 9

LEGACY RESERVES LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
	Nine Months Ended September 30,
	2006			2007
Cash flows from operating activities:
Net income (loss)	$	6,668,771		$	(4,755,112	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, amortization and accretion		12,701,726			19,065,064
Amortization of debt issuance costs		318,344			139,704
Impairment of long-lived assets		8,572,859			1,229,874
(Gain) loss on derivatives		(5,533,553	)		20,426,216
Equity in (income) loss of partnership		317,788			(40,600	)
Amortization of unit-based compensation		457,559			(68,673	)
Loss on disposal of assets		-			387,373
Changes in assets and liabilities:
Increase in accounts receivable, oil and natural gas		(6,302,693	)		(4,996,679	)
(Increase) decrease in accounts receivable, joint interest owners		(2,498,932	)		694,698
(Increase) decrease in accounts receivable, other		(449,850	)		11,429
Increase in other current assets		(702,386	)		(559,045	)
Increase (decrease) in accounts payable		687,111			(2,250,334	)
Increase in accrued oil and natural gas liabilities		3,819,783			2,685,171
Increase in due to affiliates		1,246,811			-
Increase in other current liabilities		2,514,897			1,330,260
Total adjustments		15,149,464			38,054,458
Net cash provided by operating activities		21,818,235			33,299,346
Cash flows from investing activities:
Investment in oil and natural gas properties		(45,353,007	)		(98,267,074	)
Increase in deposit on pending acquisition		-			(4,637,644	)
Investment in other equipment		(200,124	)		(501,804	)
Investment in operating rights		(7,016,672	)		-
Collection of notes receivable		924,441			-
Net cash settlements on oil and natural gas swaps		(2,182,065	)		4,235,726
Investment in equity method investee		-			(46,131	)
Net cash used in investing activities		(53,827,427	)		(99,216,927	)
Cash flows from financing activities:
Proceeds from long-term debt		112,800,000			111,000,000
Payments of long-term debt		(73,189,791	)		(133,800,000	)
Payments of debt issuance costs		(292,803	)		(336,196	)
Proceeds from issuance of units, net		77,894,654			121,554,464
Redemption of Founding Investors' units		(69,938,000	)		-
Dividend - reimbursement of offering costs paid by MBN Management LLC		(1,200,229	)		-
Capital contributed by owner		19,356			-
Cash not acquired in Legacy formation transactions		(3,104,304	)		-
Distributions to unitholders		(11,290,387	)		(29,204,017	)
Net cash provided by financing activities		31,698,496			69,214,251
Net increase (decrease) in cash and cash equivalents		(310,696	)		3,296,670
Cash and cash equivalents, beginning of period		1,954,923			1,061,852
Cash and cash equivalents, end of period	$	1,644,227		$	4,358,522
See accompanying notes to condensed consolidated financial statements.

Page 10

LEGACY RESERVES LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
(UNAUDITED)
	Nine Months Ended September 30,
	2006			2007
Non-Cash Investing and Financing Activities:
Asset retirement obligation costs and liabilities	$	1,467,241		$	-
Asset retirement obligations associated with property acquisitions	$	1,877,520		$	1,023,447
Non-controlling interests' share of net financing costs of MBN
Properties LP capitalized to oil and natural gas properties	$	164,202		$	-
Units issued to MBN Properties LP in exchange for the
non-controlling interests' share of oil and natural gas properties	$	31,743,934		$	-
Units issued to Brothers Group in exchange for:
Oil and natural gas properties	$	105,298,794		$	-
Other property and equipment	$	107,275		$	-
Units issued to H2K Holdings Ltd. in exchange for oil and
natural gas properties	$	1,419,483		$	-
Oil and natural gas hedge liabilities assumed from the
Brothers Group and H2K Holdings Ltd.	$	3,147,152		$	-
Units issued in exchange for oil and
natural gas properties	$	2,346,000		$	18,022,335
Deemed dividend to Moriah Group owners for accounts not acquired
in Legacy formation transaction:
Accounts receivable, oil and natural gas	$	4,248,157		$	-
Accounts receivable, joint interest owners	$	249,627		$	-
Accounts receivable, other	$	539,968		$	-
Other assets	$	891,300		$	-
Accounts payable	$	(213,941	)	$	-
Accrued oil and natural gas liabilities	$	(1,520,709	)	$	-
Due to affiliates	$	(1,254,215	)	$	-
Other liabilities	$	(2,166,276	)	$	-
See accompanying notes to condensed consolidated financial statements.

Page 11

LEGACY RESERVES LP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)  Organization, Basis of Presentation and Description of Business

Legacy Reserves LP and its affiliated entities are referred to as Legacy or LRLP in these financial statements.

Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

LRLP, a Delaware limited partnership, was formed by its general partner, Legacy Reserves GP, LLC (“LRGPLLC”), on October 26, 2005 to own and operate oil and natural gas properties. LRGPLLC is a Delaware limited liability company formed on October 26, 2005, and it owns less than a 0.1% general partner interest in LRLP.

On March 15, 2006, Legacy, as the successor entity to the Moriah Group (defined below), completed a private equity offering in which it (1) issued 5,000,000 limited partnership units at a gross price of $17.00 per unit, netting $76.8 million after initial purchaser’s discount, placement agent’s fee and expenses, (2) acquired certain oil and natural gas properties (Note 3) and (3) redeemed 4.4 million units for $69.9 million from the Brothers Group, H2K Holdings and MBN Properties, who, along with the Moriah Group, are its “Founding Investors.” The Moriah Group was treated as the acquiring entity in this transaction, hereinafter referred to as the “Legacy Formation.” Because the combination of the businesses that comprised the Moriah Group was a reorganization of entities under common control, the combination of these businesses was reflected retroactively at carryover basis in these condensed consolidated financial statements. The accounts presented for periods prior to the Legacy Formation transaction are those of the Moriah Group.

On January 18, 2007, Legacy closed its initial public offering (“IPO”) of 6,900,000 limited partnership units at an IPO price of $19.00 per unit. Net proceeds to the partnership after underwriting discounts and estimated offering expenses were approximately $122 million, which were used to repay all indebtedness outstanding under the partnership’s credit facility and for general partnership purposes.

Significant information regarding rights of the limited partners includes the following:

 • Right to receive, within 45 days after the end of each quarter, distributions of available cash, if distributions are declared.

 • No limited partner shall have any management power over our business and affairs; the general partner shall conduct, direct and manage LRLP’s activities.

 • The general partner may be removed if such removal is approved by the unitholders holding at least 66 2/3 percent of the outstanding units, including units held by LRLP’s general partner and its affiliates provided that a unit majority has elected a successor general partner.

 • Right to receive information reasonably required for tax reporting purposes within 90 days after the close of the calendar year.

In the event of a liquidation, all property and cash in excess of that required to discharge all liabilities will be distributed to the unitholders and LRLP’s general partner in proportion to their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of Legacy’s assets in liquidation.

As used herein, the term Moriah Group refers to Moriah Resources, Inc. (“MRI”), Moriah Properties, Ltd. (“MPL”), the oil and natural gas interests individually owned by Dale A. and Rita Brown and the accounts of MBN Properties LP on a consolidated basis unless the context specifies otherwise. Prior to March 15, 2006, the accompanying financial statements include the accounts of the Moriah Group. From March 15, 2006, the accompanying financial statements also include the results of operations of the oil and natural gas properties acquired in the Legacy Formation transaction.

Page 12

All significant intercompany accounts and transactions have been eliminated. The Moriah Group consolidated MBN Properties LP as a variable interest entity under FASB Interpretation Number “FIN” 46R since the Moriah Group was the primary beneficiary of MBN Properties LP. The partners, shareholders and owners of these entities have other investments, such as real estate, that are held either individually or through other legal entities that are not presented as part of these financial statements.

Legacy owns and operates oil and natural gas producing properties located primarily in the Permian Basin of West Texas and southeast New Mexico. Legacy has acquired oil and natural gas producing properties and undrilled leasehold.

The accompanying financial statements have been prepared on the accrual basis of accounting whereby revenues are recognized when earned, and expenses are recognized when incurred. These condensed consolidated financial statements as of September 30, 2007 and for the three and nine months ended September 30, 2007 and 2006 are unaudited.  In the opinion of management, such financial statements include the adjustments and accruals which are necessary for a fair presentation of the results for the interim periods. These interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in these financial statements for and as of the three and nine months ended September 30, 2007 and 2006.

(2)  Credit Facility

On September 13, 2005, the Moriah Group replaced its existing credit agreement with a new senior credit facility (the “New Facility”) with a new lending group that permitted borrowings in the lesser amount of (i) the borrowing base, or (ii) $75 million. The borrowing base under the New Facility, initially set at $40 million, was subject to re-determination every six months and was subject to adjustment based upon changes in the fair market value of the Moriah Group’s oil and natural gas assets. Interest on the New Facility was payable monthly and was charged in accordance with the Moriah Group’s selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate plus 0.5%, dependent on the percentage of the borrowing base which was drawn. Borrowings under this New Facility were due in September 2009. The New Facility contained certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. On September 13, 2005, the Moriah Group borrowed $22,123,000 from the new lending group to provide for general corporate purposes, to fund a $4.2 million distribution to Cary Brown and Dale Brown and to advance additional subordinated notes receivable in the amount of $17,598,000 to MBN Properties LP, which purchased oil and natural gas producing properties from PITCO. The Moriah Group’s interest rate at December 31, 2005 was 6.0%. The Moriah Group paid interest expense on this debt of $264,062 for the period from January 1, 2006 through March 15, 2006. All amounts outstanding under the New Facility at March 15, 2006 were repaid in full on that date as part of the formation transactions.

On September 13, 2005, MBN Properties LP entered into a senior credit facility (the “MBN Facility”) with a lending group that permitted borrowings in the lesser amount of (i) the borrowing base, or (ii) $75 million. The borrowing base under the MBN Facility, initially set at $35 million, was subject to re-determination every six months and was subject to adjustment based upon changes in the fair market value of the MBN Properties LP’s oil and natural gas assets. Interest on the MBN Facility was payable monthly and was charged in accordance with MBN Properties LP’s selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate plus 0.50%, dependent on the percentage of the borrowing base which was drawn. Borrowings under this MBN Facility were due in September 2007. The MBN Facility contained certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. On September 13, 2005, MBN Properties LP borrowed $33,750,000 from the new lending group to purchase oil and natural gas producing properties from PITCO. MBN Properties LP paid interest expense of $1,300,727 for the period from January 1, 2006 through March 15, 2006. All amounts outstanding under the MBN Facility at March 15, 2006 were repaid in full on that date as part of the formation transactions.

As an integral part of the Legacy Formation, Legacy entered into a new credit agreement with a new senior credit facility (the “Legacy Facility”) with the same lending group that participated in the New Facility of the Moriah Group. Legacy’s oil and natural gas properties are pledged as collateral for any borrowings under the Legacy Facility. The terms of the Legacy Facility permitted borrowings in the lesser amount of (i) the borrowing base, or (ii) $300 million. The borrowing base under the Legacy Facility, which was initially set at $130 million, is re-determined every six months and will be adjusted based upon changes in the fair market value of Legacy’s oil and natural gas assets. Interest on the Legacy Facility is payable monthly and was charged in accordance with Legacy’s selection of a LIBOR rate plus 1.25% to 1.875%, or prime rate up to prime rate plus 0.375%, dependent on the percentage of the borrowing base which is drawn. On March 15, 2006, Legacy borrowed $65.8 million from the new lending group as part of the Legacy Formation. On May 3, 2007, Legacy’s bank group increased Legacy’s borrowing base to $150 million as part of the semi-annual re-determination. On October 24, 2007, the Legacy Facility was amended, increasing the borrowing base to $225 million and the borrowing capacity to $500 million. Pursuant to this amendment, interest on debt outstanding is charged based on Legacy’s selection of a LIBOR rate plus 1.00% to 1.75%, or the alternate base rate which equals the higher of the prime rate or the Federal funds effective rate plus 0.50%, plus an applicable margin between 0% and 0.25%.

Page 13

On January 18, 2007, Legacy closed its initial public offering of 6,900,000 units representing limited partner interests at an initial public offering price of $19.00 per unit. Net proceeds to the partnership after underwriting discounts and estimated offering expenses were approximately $122 million, all of which was used to repay all indebtedness outstanding under the Legacy Facility and for general partnership purposes.

 As of September 30, 2007, Legacy had outstanding borrowings of $93.0 million at an interest rate of 6.92%. Legacy had approximately $101.7 million of availability remaining under the Legacy Facility as of September 30, 2007. For the three-month and nine-month period ended September 30, 2007, Legacy paid $1,295,619 and $2,258,164 of interest expense on the Legacy Facility, respectively. The Legacy Facility contains certain loan covenants requiring minimum financial ratio coverages, involving the current ratio and EBITDA to interest expense. At December 31, 2006 and September 30, 2007, Legacy was in compliance with all aspects of the Legacy Facility.

Long-term debt consists of the following at December 31, 2006 and September 30, 2007:

	December 31,		September 30,
	2006		2007
Legacy facility- due March 2010	$	115,800,000	$	93,000,000

  

(3)  Acquisitions

Legacy Formation Acquisition

On March 15, 2006, LRLP completed a private equity offering in which it issued 5,000,000 units representing limited partner interests at a gross price of $17.00 per unit, netting $76.8 million after initial purchaser’s discount, placement agent fees and expenses. Simultaneous with the completion of this offering, Legacy purchased the oil and natural gas properties of the Moriah Group, Brothers Group, H2K Holdings Ltd. and the Charitable Support Foundations, Inc. and its affiliates. Legacy also purchased the oil and natural gas properties owned by MBN Properties, LP. In the case of the Moriah Group, the Brothers Group and H2K Holdings Ltd. those entities exchanged their oil and natural gas properties for units representing limited partner interests. The purchase of the oil and natural gas properties owned by the charitable foundations was solely for cash of $7.7 million. The Founding Investors exchanged 4.4 million of their units for $69.9 million in cash. The Moriah Group has been treated as the acquiring entity in the Legacy Formation. Accordingly, the accounts of the businesses acquired from the Moriah Group have been reflected retroactively at carryover basis in the consolidated financial statements, and the units issued to acquire them have been accounted for as a recapitalization. The net assets of the other businesses acquired and the units issued in exchange for them have been reflected at fair value and included in the statement of operations from the date of acquisition. With the exception of its assumption of liabilities associated with the oil and natural gas swaps it acquired, the other depreciable assets of the Brothers Group (office furniture and equipment and vehicles) and certain unamortized deferred financing costs of the Moriah Group, LRLP did not acquire any other assets or liabilities of the Moriah Group, the Brothers Group, H2K Holdings Ltd. or the Charitable Support Foundations, Inc. and its affiliates. The removal of the other assets and liabilities of the Moriah Group was reflected as a deemed dividend in the quarter ended March 31, 2006.

The following table sets forth the units issued in the Legacy Formation transaction:

	Number of units
MPL		7,334,070
DAB Resources, Ltd.		859,703
Moriah Group		8,193,773
Brothers Group		6,200,358
H2K Holdings Ltd.		83,499
MBN Properties LP		3,162,438
Other investors		600,000
Total units issued at Legacy Formation		18,240,068

In addition to the 18,240,068 units issued at Legacy Formation, 52,616 restricted units were issued to employees of Legacy concurrent with, but not as a part of, the Legacy Formation (Note 9).

Page 14

The following table sets forth the purchase price of the oil and natural gas properties purchased from the Brothers Group, H2K Holdings Ltd. and three charitable foundations, which included the assumption of liabilities associated with oil and natural gas swaps as of March 14, 2006:

	Number of Units		Purchase Price
	at $17.00 per unit		of Assets Acquired
Brothers Group		6,200,358	$	105,406,069
H2K Holdings Ltd.		83,499		1,419,483
Cash paid to three charitable foundations		-		7,682,854
Total purchase price before liabilities assumed				114,508,406
Plus:
Oil and natural gas swap liabilities assumed				3,147,152
Asset retirement obligations incurred				1,467,241
Less:
Office furniture, equipment and vehicles acquired				(107,275	)
Total purchase price allocated to oil and
natural gas properties acquired			$	119,015,524

In addition to the 3,162,438 units issued to MBN Properties LP as part of the Legacy Formation transaction, LRLP paid $65.3 million in cash to MBN Properties LP to acquire that portion of the oil and natural gas properties of MBN Properties LP it did not already own by virtue of the Moriah Group’s ownership of a 46.22% limited partnership interest in MBN Properties LP. In addition, LRLP paid $1,980,468 to MBN Management LLC to reimburse expenses incurred by that entity in anticipation of the Legacy Formation. The following table sets forth the calculation of the step-up of oil and natural gas property basis with respect to this interest acquired:

	Number of Units			Purchase Price of
	at $17.00 per unit			Assets Acquired
Units issued to MBN Properties LP		3,162,438		$	53,761,446
Cash paid to MBN Properties LP		-			65,300,000
Total purchase price before liabilities assumed					119,061,446
Plus:
Oil and natural gas swap liabilities assumed					2,539,625
ARO liabilities assumed					453,913
Less:
Net book value of other property and equipment on
MBN Properties LP at March 14, 2006					(39,056	)
					122,015,928
Less:
Net book value of oil and natural gas assets on
MBN Properties LP at March 14, 2006					(62,990,390	)
Purchase price in excess of net book value of assets					59,025,538
Less:
Share already owned by Moriah via consolidation
of MBN Properties LP		46.22	%		(27,281,604	)
Non-controlling interest share to record					31,743,934
Plus:
Elimination of deferred financing costs related to
non-controlling interests' share of MBN Properties LP					164,202
Reimbursement of Brothers Group's share of  MBN
Management LLC losses from inception through
March 14, 2006					780,239
MBN Properties LP purchase price to allocate
to oil and natural gas properties				$	32,688,375
Units related to purchase of non-controlling interest		1,867,290
Units related to interest previously owned by Moriah Group		1,295,148
Total units issued to MBN Properties LP		3,162,438

Page 15

Larron Acquisition

On June 29, 2006, Legacy purchased a 100% working interest and an approximate 82% net revenue interest in producing leases located in the Farmer Field for $5.7 million. The conveyance of the leases was effective April 1, 2006. The $5.6 million net purchase price was allocated with $4.6 million recorded as lease and well equipment and $1.0 million of leasehold costs. Asset retirement obligations in the amount of $328,867 were recognized in connection with this acquisition. The operations of these Farmer Field properties have been included from their acquisition on June 29, 2006.

South Justis Unit Acquisition

On June 29, 2006, Legacy purchased Henry Holding LP’s 15.0% working interest and a 13.1% net revenue interest in the South Justis Unit (“SJU”), two leases not in the unit, each with one well, adjacent to the SJU and the right to operate these properties. The stated purchase price was $14 million cash plus the issuance of 138,000 units on June 29, 2006 and 8,415 units on November 10, 2006 at their estimated fair value of $17.00 per unit ($2,346,000 and $143,055, respectively) less final adjustments of approximately $624,000. The effective date of Legacy’s ownership was May 1, 2006. The operating results from this acquisition have been included from July 1, 2006. The properties acquired are located in Lea County, New Mexico where Legacy owns other producing properties. Legacy was elected operator of the SJU following the closing of the transaction, which entitles Legacy to a contractual overhead reimbursement of approximately $127,500 per month from its partners in the SJU. The $15.9 million net purchase price was allocated with $2.9 million recorded as lease and well equipment, $6.0 million of leasehold costs and $7.0 million capitalized as an intangible asset relating to the contract operating rights. The capitalized operating rights are being amortized over the estimated total well months the wells in the SJU are expected to be operated. Asset retirement obligations in the amount of $137,453 were recognized in connection with this acquisition. The operations of the South Justis Unit have been included from the acquisition on June 29, 2006.

Kinder Morgan Acquisition

On July 31, 2006, Legacy purchased certain oil and natural gas properties located in the Permian Basin from Kinder Morgan for a net purchase price of $17.2 million (“Kinder Morgan Acquisition”). The effective date of this purchase was July 1, 2006. The $17.2 million purchase price was allocated with $4.1 million recorded as lease and well equipment and $13.1 million of leasehold costs. Asset retirement obligations of $1,383,180 were recorded in connection with this acquisition. The operations of these Kinder Morgan Acquisition properties have been included from their acquisition on July 31, 2006.

Binger Acquisition

On April 16, 2007, Legacy purchased certain oil and natural gas properties and other interests in the East Binger (Marchand) Unit in Caddo County, Oklahoma from Nielson & Associates, Inc. for a net purchase price of $44.2 million (“Binger Acquisition”). The purchase price was paid with the issuance of 611,247 units valued at $15.8 million and $28.4 million paid in cash. The effective date of this purchase was February 1, 2007. The $44.2 million purchase price was allocated with $14.7 million recorded as lease and well equipment, $29.4 million of leasehold costs and $0.1 million as investment in equity method investee related to the 50% interest acquired in Binger Operations, LLC. Asset retirement obligations of $184,636 were recorded in connection with this acquisition. The operations of these Binger Acquisition properties have been included from their acquisition on April 16, 2007.

Ameristate Acquisition

On May 1, 2007, Legacy purchased certain oil and natural gas properties located in the Permian Basin from Ameristate Exploration, LLC for a net purchase price of $5.2 million (“Ameristate Acquisition”). The effective date of this purchase was January 1, 2007. The $5.2 million purchase price was allocated with $0.5 million recorded as lease and well equipment and $4.7 million of leasehold costs. Asset retirement obligations of $51,414 were recorded in connection with this acquisition. The operations of these Ameristate Acquisition properties have been included from their acquisition on May 1, 2007.

TSF Acquisition

On May 25, 2007, Legacy purchased certain oil and natural gas properties located in the Permian Basin from Terry S. Fields for a net purchase price of $14.7 million (“TSF Acquisition”). The effective date of this purchase was March 1, 2007. The $14.7 million purchase price was allocated with $1.8 million recorded as lease and well equipment and $12.9 million of leasehold costs. Asset retirement obligations of $99,094 were recorded in connection with this acquisition. The operations of these TSF Acquisition properties have been included from their acquisition on May 25, 2007.

Raven Shenandoah Acquisition

On May 31, 2007, Legacy purchased certain oil and natural gas properties located in the Permian Basin from Raven Resources, LLC and Shenandoah Petroleum Corporation for a net purchase price of $13.0 million (“Raven Shenandoah Acquisition”). The effective date of this purchase was May 1, 2007. The $13.0 million purchase price was allocated with $6.0 million recorded as lease and well equipment and $7.0 million of leasehold costs. Asset retirement obligations of $378,835 were recorded in connection with this acquisition. The operations of these Raven Shenandoah Acquisition properties have been included from their acquisition on May 31, 2007.

Page 16

Raven OBO Acquisition

On August 3, 2007, Legacy purchased certain oil and natural gas properties located primarily in the Permian Basin from Raven Resources, LLC and private parties for a net purchase price of $20.0 million (“Raven OBO Acquisition”). The effective date of this purchase was July 1, 2007. The $20.0 million purchase price was allocated with $1.6M recorded as lease and well equipment and $18.4 million of leasehold costs. Asset retirement obligations of $224,329 were recorded in connection with this acquisition. The operations of these Raven OBO Acquisition properties have been included from their acquisition on August 3, 2007.

Pro Forma Operating Results

The following table reflects the unaudited pro forma results of operations as though the Formation Transactions and the Farmer Field, South Justis Unit, Kinder Morgan, Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions had each occurred on January 1, 2006 and January 1, 2007, respectively. The pro forma amounts are not necessarily indicative of the results that may be reported in the future:

	September 30,
	2006		2007
	(In thousands)
Revenues, excluding hedging gains and losses	$	77,416	$	78,525
Revenues, net of hedging gains and losses	$	81,645	$	58,373
Net income	$	13,478	$	(3,345	)
Earnings (loss) per unit:
Basic	$	0.71	$	(0.13	)
Diluted	$	0.71	$	(0.13	)
Units used in computing earnings (loss) per unit:
Basic		19,003,210		25,727,616
Diluted		19,014,085		25,727,616

(4)  Related Party Transactions

Cary Brown and Dale Brown, as owners of the Moriah Group, and the Brothers Group own a combined non-controlling 4.16% interest as limited partners in the partnership which owns the building that Legacy occupies. Monthly rent is $14,808, without respect to property taxes and insurance. Prior to the Legacy Formation, the Moriah Group’s portion of this rent was reimbursed by the Moriah Group to Petroleum Strategies, Inc., an affiliated entity which is owned by Cary Brown and Dale Brown. The lease expires in August 2011.

The Moriah Group did not directly employ any persons or directly incur any office overhead. Substantially all general and administrative services were provided by Petroleum Strategies, Inc. which employed all personnel and paid for all employee salaries, benefits, and office expenses. Petroleum Strategies Inc. charged the Moriah Group for such services in an amount which was intended to be equal to the actual expenses it incurred. Amounts charged were $444,827 and $0 for the nine months ended September 30, 2006 and 2007, respectively. On April 1, 2006, following the Legacy Formation, certain employees of Petroleum Strategies, Inc. and Brothers Production Company Inc. became employees of Legacy. For the period from March 15, 2006 to September 30, 2006, Brothers Production Company Inc. provided $47,236 of transition administrative services to Legacy.

Legacy uses Lynch, Chappell and Alsup for legal services. Alan Brown, son of Dale Brown and brother of Cary Brown, is a less than ten percent shareholder in this firm. Legacy paid legal fees to Lynch, Chappell and Alsup of $39,003 and $82,143 for the nine months ended September 30, 2006 and 2007, respectively.

(5)  Commitments and Contingencies

From time to time Legacy is a party to various legal proceedings arising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, Legacy is not currently a party to any proceeding that it believes, if determined in a manner adverse to Legacy, could have a potential material adverse effect on its financial condition, results of operations or cash flows. Legacy believes the likelihood of such a future event to be remote.

Additionally, Legacy is subject to numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. To the extent laws are enacted or other governmental action is taken that restricts drilling or imposes environmental protection requirements that result in increased costs to the oil and natural gas industry in general, the business and prospects of Legacy could be adversely affected.

Legacy has employment agreements with its officers that specify that if the officer is terminated by Legacy for other than cause or following a change in control, the officer shall receive severance pay ranging from 24 to 36 months salary plus bonus and COBRA benefits.

Page 17

(6)  Derivative Financial Instruments

Due to the volatility of oil and natural gas prices, Legacy periodically enters into price-risk management transactions (e.g., swaps) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits Legacy’s ability to benefit from increases in the price of oil and natural gas, it also reduces Legacy’s potential exposure to adverse price movements. Legacy’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices and limit Legacy’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes.

All of these price-risk management transactions are considered derivative instruments and accounted for in accordance with SFAS No. 133 — Accounting for Derivative Instruments and Hedging Activities. These derivative instruments are intended to reduce Legacy’s price risk and may be considered hedges for economic purposes but Legacy has chosen not to designate them as cash flow hedges for accounting purposes. Therefore, all derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period earnings.

By using derivative instruments to mitigate exposures to changes in commodity prices, Legacy exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Legacy, which creates repayment risk. Legacy minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties.

For the three and nine months ended September 30, 2006 and 2007, Legacy included in revenue realized and unrealized losses related to its oil and natural gas derivatives. The impact on total revenue from hedging activities was as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2007			2006			2007
Crude oil derivative contract settlements	$	(5,798,140	)	$	(845,744	)	$	(6,897,833	)	$	1,198,916
Natural gas liquid derivative contract settlements		-			(118,044	)		-			(159,395	)
Natural gas derivative contract settlements		1,669,838			1,372,154			4,715,768			3,196,205
Unrealized change in fair value - oil contracts		19,770,172			(7,677,256	)		1,342,276			(20,860,444	)
Unrealized change in fair value - natural gas liquid contracts		-			(650,285	)		-			(940,557	)
Unrealized change in fair value - natural gas contracts		2,963,768			1,483,423			6,373,342			(2,586,381	)
	$	18,605,638		$	(6,435,752	)	$	5,533,553		$	(20,151,656	)

As of September 30, 2007, Legacy had the following NYMEX West Texas Intermediate crude oil swaps paying floating prices and receiving fixed prices for a portion of its future oil production as indicated below:

	Annual	Average	Price
Calendar Year	Volumes (Bbls)	Price per Bbl	Range per Bbl
2007	273,578	$                 68.81	$64.15 - $75.70
2008	1,025,249	$                 68.57	$62.25 - $73.45
2009	948,013	$                 66.65	$61.05 - $71.40
2010	883,445	$                 65.26	$60.15 - $71.15
2011	665,040	$                 70.17	$67.33 - $71.40
2012	549,600	$                 70.04	$67.72 - $71.15

As of September 30, 2007, Legacy had the following NYMEX Henry Hub, ANR-OK and Waha natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of its future natural gas production as indicated below:

	Annual	Average	Price
Calendar Year	Volumes (MMBtu)	Price per MMBtu	Range per MMBtu
2007	656,192	$                   8.59	$6.85 - $10.01
2008	2,402,970	$                   8.17	$6.85 - $10.58
2009	2,217,470	$                   8.01	$6.85 - $10.18
2010	1,962,755	$                   7.74	$6.85 - $9.73
2011	694,024	$                   7.21	$6.85 - $7.51
2012	404,436	$                   7.07	$6.85 -  $7.30

Page 18

As of September 30, 2007, Legacy had the following gas basis swaps in which it receives floating NYMEX prices less a fixed basis differential and pay prices on the floating Waha index, a natural gas hub in West Texas. The prices that Legacy receives for its natural gas sales follow Waha more closely than NYMEX:

	Annual	Basis
Calendar Year	Volumes (Mcf)	Differential per Mcf
2007	390,000	($0.88)
2008	1,422,000	($0.84)
2009	1,320,000	($0.68)
2010	1,200,000	($0.57)

As of September 30, 2007, Legacy had the following Mont Belvieu, Non-Tet OPIS natural gas liquids swaps paying floating natural gas liquids prices and receiving fixed prices for a portion of its future natural gas liquids production as indicated below:

	Annual	Average	Price
Calendar Year	Volumes (Gal)	Price per Gal	Range per Gal
2007	1,682,838	$                   1.32	$0.79 - $1.68
2008	6,458,004	$                   1.27	$0.66 - $1.62
2009	2,265,480	$                   1.15	$1.15

On August 29, 2007, Legacy entered into LIBOR interest rate swaps beginning in October of 2007 and extending through November 2011. The swap transaction has Legacy paying its counterparty floating rates and receiving fixed rates ranging from 4.8075% to 4.82%, per annum, on a total notional amount of $54 million. The swaps are settled on a quarterly basis, beginning  in January of 2008 and ending in November of 2011. The table below summarizes the interest rate swap position as of September 30, 2007.

Legacy accounts for these interest rate swaps pursuant to FAS No. 133 – Accounting for Derivative Insruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards requiring that derivative instruments be recorded at fair market value and included in the balance sheet as assets or liabilities.

As the term of Legacy’s interest rate swaps extend through November of 2011, a period that extends beyond the term of the credit agreement, which expires on March 15, 2010, Legacy did not specifically designate these derivatives as cash flow hedges, even though they reduce its exposure to changes in interest rates. Therefore, the mark-to-market of these instruments is recorded in current earnings.

 

				Estimated
				Fair Market Value
	Fixed	Effective	Maturity	at September 30,
Notional Amount	Rate	Date	Date	2007
$29,000,000	4.8200%	10/16/2007	10/17/2011	($149,901)
$13,000,000	4.8100%	11/16/2007	11/16/2011	(64,927)
$12,000,000	4.8075%	11/28/2007	11/28/2011	(59,732)
Total Fair Market Value				($274,560)

 (7)  Asset Retirement Obligation

Statement of Financial Accounting Standards “SFAS” No. 143 requires that an asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred and becomes determinable. Under this method, when liabilities for dismantlement and abandonment costs, excluding salvage values, are initially recorded, the carrying amount of the related oil and natural gas properties is increased. The fair value of the ARO asset and liability is measured using expected future cash outflows discounted at Legacy’s credit-adjusted risk-free interest rate. Accretion of the liability is recognized each period using the interest method of allocation, and the capitalized cost is depleted over the useful life of the related asset.

The following table reflects the changes in the ARO during the year ended December 31, 2006 and nine months ended September 30, 2007.

	December 31,			September 30,
	2006			2007
Asset retirement obligation - beginning of period	$	2,302,147		$	6,492,780
Liabilities incurred in Legacy formation		1,467,241			-
Liabilities incurred with properties acquired		1,888,954			1,026,335
Liabilities incurred with properties drilled		22,882			-
Liabilities settled during the period		(213,343	)		(297,338	)
Current period accretion		242,432			294,268
Current period revisions to oil and natural gas properties		782,467			-
Asset retirement obligation - end of period	$	6,492,780		$	7,516,045

Page 19

(8)  Earnings Per Unit

The following table sets forth the computation of basic and diluted net earnings per unit (in thousands, except per unit):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2007		2006		2007
Income available to unitholders	$	13,944	$	2,164	$	6,669	$	(4,755	)
Weighted average number of units outstanding		18,386,817		26,021,518		15,952,509		25,492,521
Effect of dilutive securities:
Unit options		-		30,700		-		-
Restricted units		-		20,668		-		-
Weighted average units and potential units outstanding		18,386,817		26,072,886		15,952,509		25,492,521
Basic earnings per unit	$	0.76	$	0.08	$	0.42	$	(0.19	)
Diluted earnings per unit	$	0.76	$	0.08	$	0.42	$	(0.19	)

(9)  Unit-Based Compensation

Long Term Incentive Plan

Concurrent with the Legacy Formation on March 15, 2006, a Long-Term Incentive Plan (“LTIP”) for Legacy was created and Legacy adopted SFAS No. 123(R)-Share-Based Payment. Legacy adopted the Legacy Reserves LP Long-Term Incentive Plan for its employees, consultants and directors, its affiliates and its general partner. The awards under the LTIP may include unit grants, restricted units, phantom units, unit options and unit appreciation rights. The LTIP permits the grant of awards covering an aggregate of 2,000,000 units. As of September 30, 2007 grants of awards net of forfeitures covering 392,460 units had been made. The LTIP is administered by the compensation committee of the board of directors of Legacy’s general partner.

SFAS No. 123(R) requires companies to measure the cost of employee services in exchange for an award of equity instruments based on a grant-date fair value of the award (with limited exceptions), and that cost must generally be recognized over the-vesting period of the award. Prior to April of 2007, Legacy utilized the equity method of accounting as described in SFAS No. 123(R) to recognize the cost associated with unit options. However, SFAS No. 123(R) stipulates that “if an entity that nominally has the choice of settling awards by issuing stock predominately settles in cash, or if the entity usually settles in cash whenever an employee asks for cash settlement, the entity is settling a substantive liability rather than repurchasing an equity instrument.”

The initial vesting of options occurred on March 15, 2007, with initial option exercises occurring in April 2007. At the time of the initial exercise Legacy settled these exercises in cash and determined it was likely to do so for future option exercises. Consequently, in April 2007, Legacy began accounting for unit option grants by utilizing the liability method as described in SFAS No. 123(R). The liability method requires companies to measure the cost of the employee services in exchange for a cash award based on the fair value of the underlying security at the end of the period. Compensation cost is recognized based on the change in the liability between periods.

As described below, Legacy has also issued phantom units under the LTIP. Because Legacy’s current intent is to settle these awards in cash, Legacy is accounting for the phantom units by utilizing the liability method.

On June 27, 2007, Legacy granted 3,000 phantom units to an employee. On July 16, 2007, Legacy granted 5,000 phantom units to an employee. The phantom units awarded vest ratably over a five year period, beginning on the date of grant. In conjunction with this grant, the employees are entitled to dividend equivalent rights (“DER’s”) for unvested units held at the date of dividend payment. Compensation expense related to the phantom units and associated DER’s was $22,027 for the nine months ended September 30, 2007.

On August 20, 2007, the board of directors of Legacy’s general partner, upon recommendation from the Compensation Committee, approved phantom unit awards which may award up to 175,000 units to five key executives of Legacy based on achievement of targeted annual MLP distribution levels over a base amount of $1.64 per unit.  These awards are to be determined annually based solely on the annualized level of per unit distributions for the fourth quarter of each calendar year and subsequently vested over a 3 year period. There is a range of 0% to 100% of the distribution levels at which the performance condition may be met. For each quarter, management recommends to the board an appropriate level of per unit distribution based on available cash of Legacy. This level of distribution is approved by the board subsequent to management’s recommendation. Probable issuances for the purposes of calculating compensation expense associated therewith are determined based on management’s determination of probable future distribution levels. Expense associated with probable vesting is recognized over the period from the date probable vesting is determined to the end of the three year vesting period. Compensation expense related to the phantom units was $8,435 for the nine months ended September 30, 2007.

Page 20

On March 15, 2006, Legacy issued an aggregate of 52,616  restricted units to two employees. The restricted units awarded vest ratably over a three-year period, beginning on the date of grant. On May 5, 2006, Legacy issued 12,500  restricted units to an employee. The restricted units awarded vest ratably over a five-year period, beginning on the date of grant. Compensation expense related to restricted units was $184,875 and $255,492 for the nine months ended September, 30, 2006 and 2007, respectively. As of September 30, 2007, there was a total of $581,439 of unrecognized compensation expense related to the non-vested portion of these restricted units. At September 30, 2007, this cost was expected to be recognized over a weighted-average period of 2.0 years. Pursuant to the provisions of SFAS 123(R), Legacy’s issued units, as reflected in the accompanying consolidated balance sheet at September 30, 2007 does not include 45,078 units related to unvested restricted unit awards.

On May 1, 2006, Legacy granted and issued 1,750 units to each of its five non-employee directors as part of their annual compensation for serving on the board of directors of Legacy’s general partner. The value of each unit was $17.00 at the time of grant.

During the year ended December 31, 2006, Legacy issued 273,000 unit option awards to officers and employees which vest ratably over a three-year period. All options granted in 2006 expire five years from the grant date and are exercisable when they vest. During the nine month period ended September 30, 2007, Legacy issued 83,000 unit option awards to employees which vest ratably over a three-year period. During the nine-month period ended September 30, 2007, Legacy issued 66,116 unit option awards which cliff-vest at the end of a three-year period. All options granted in 2007 expire five years from the grant date and are exercisable when they vest.

For the nine-month period ended September 30, 2007, Legacy recorded $855,345 of compensation expense based on its use of the Black-Scholes model to estimate the September 30, 2007 fair value of these unit option awards and options exercised during the period. As of September 30, 2007, there was a total of $1,262,999 of unrecognized compensation costs related to the non-vested portion of these unit option awards. At September 30, 2007, this cost was expected to be recognized over a weighted-average period of 2.10 years. Compensation expense is based upon the fair value as of September 30, 2007 and is recognized as a percentage of the service period satisfied. Since Legacy is a new public company and has minimal trading history, it has used an estimated volatility factor of approximately 42% based upon the historical trends of a representative group of publicly-traded companies in the energy industry and employed the fair value method to estimate the September 30, 2007 fair value to be realized as compensation cost based on the percentage of service period satisfied. In the absence of historical data, Legacy has assumed an estimated forfeiture rate of 5%. As required by SFAS No. 123(R), the Company will adjust the estimated forfeiture rate based upon actual experience. Legacy has assumed an annual distribution rate of $1.68 per unit.

A summary of option activity for the nine months ended September 30, 2007 is as follows:

			Weighted
		Weighted	Average
		Average	Remaining
		Exercise	Contractual
	Units	Price	Term
Outstanding at January 1, 2007	260,000	$          17.01
Granted	149,116	$          23.28
Exercised	(23,038)	$          17.00
Forfeited	(16,656)	$          17.09
Outstanding at September 30, 2007	369,422	$          19.54	4.1 years
Options exercisable at September 30, 2007	61,798	$          17.01	-

The following table summarizes the status of the Legacy’s non-vested unit options since January 1, 2007:

	Non-Vested Options
				Weighted-
	Number of			Average Fair
	Units			Value
Non-vested at January 1, 2007		260,000		$	2.62
Granted		149,116		$	4.54
Vested - Unexercised		(61,798	)	$	6.10
Vested - Exercised		(23,038	)	$	10.14
Forfeited		(16,656	)	$	9.56
Non-vested at September 30, 2007		307,624		$	5.47

Legacy has used a weighted-average risk free interest rate of 4.6% in its Black-Scholes calculation of fair value, which approximates the U.S. Treasury interest rates at September 30, 2007 whose term is consistent with the expected life of the unit options. Expected life represents the period of time that options are expected to be outstanding and is based on Legacy’s best estimate. The following table represents the weighted average assumptions used for the Black-Scholes option-pricing model.

	Nine Months Ended
	September 30,
	2007
Expected life (years)		5
Annual interest rate		4.6	%
Annual distribution rate per unit	$	1.68
Volatility		42	%

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 (10)  Subsequent Events

On August 30, 2007, Legacy entered into a definitive purchase agreement to acquire certain oil and natural gas producing properties from a private party for a cash purchase price of $15.3 million, subject to customary purchase price adjustments. The properties are located in the Permian Basin. The acquisition closed on October 1, 2007. This acquisition will be accounted for as a purchase of oil and natural gas assets.

On September 4, 2007, Legacy entered into a definitive purchase agreement to acquire certain oil and natural gas producing properties from private parties for a cash purchase price of $60.5 million, subject to customary purchase price adjustments. The properties are located in the Permian Basin. The acquisition closed on October 1, 2007. This acquisition will be accounted for as a purchase of oil and natural gas assets.

On October 24, 2007, Legacy entered into a Third Amendment to Credit Agreement (the “Third Amendment”) to the Legacy Facility. Pursuant to the Third Amendment, the maximum credit amount has been increased to $500 million and the borrowing base has been increased to $225 million.  Additionally, the Legacy Facility provides that Legacy may elect that borrowing be comprised entirely of alternate base rate (ABR) loans or Eurodollar Loans. Under the Third Amendment, interest on the loans is determined, with respect to ABR Loans, the alternate base rate equals the higher of the prime rate or the Federal funds effective rate plus 0.50%, plus an applicable margin between 0% and 0.25%; and with respect to Eurodollar loans, interest is calculated using the London interbank rate (LIBOR) plus an applicable margin between 1.00% and 1.75%.

On October 18, 2007, Legacy’s Board of Directors approved a distribution of $0.43 per unit payable on November 14, 2007 to unitholders of record on October 31, 2007.

Legacy entered into a Unit Purchase Agreement (the “Purchase Agreement”), dated effective as of November 7, 2007, with Legacy Reserves GP, LLC and certain institutional investors (the “Purchasers”) to sell an aggregate of 3,642,369 units representing limited partner interests in LRLP (the “Units”) in a private placement (the “Private Placement”). The negotiated purchase price for the Units in the Purchase Agreement was $20.50 per unit, or approximately $75 million in the aggregate.

The Private Placement closed, and 3,642,369 Units were issued, on November 8, 2007. LRLP will use the net proceeds from the Private Placement primarily to reduce debt currently outstanding under the Legacy Facility.  The borrowings were used to finance the acquisition of properties in the Texas Panhandle and Permian Basin which closed during October 2007 for approximately $74 million.  The Private Placement pursuant to the Purchase Agreement is being made in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

 In connection with the Purchase Agreement, LRLP also entered into a Registration Rights Agreement dated November 8, 2007 (the “Registration Rights Agreement”) with the Purchasers. The Registration Rights Agreement requires LRLP to file a shelf registration statement with the Securities and Exchange Commission (“SEC”) to register the Units as soon as practicable after the closing date of the Private Placement, but in any event within 90 days after the closing, which occurred on November 8, 2007. In addition, the Registration Rights Agreement requires LRLP to use its commercially reasonable efforts to cause the shelf registration statement to become effective no later than 180 days after the closing date of the Private Placement (the “Target Effective Date”). If the registration statement covering the Units is not declared effective by the SEC within 180 days after the closing date of the Private Placement (the “Target Effective Date”), then LRLP will be liable to each Purchaser for liquidated damages, and not as a penalty, of 0.25% of the product of $20.50 (the purchase price) times the number of Units purchased by the Purchaser (the “Liquidated Damages Amount”) per the 30-day period for the first 30 days following the Target Effective Date, increasing by an additional 0.25% of the Liquidated Damages Amount per each non-overlapping 30-day period for each subsequent 30-day period subsequent to the 30 days following the Target Effective Date, up to a maximum of 1.00% of the Liquidated Damages Amount per each non-overlapping 30-day period (i.e., 0.25% for 1-30 days; 0.5% for 31-60 days; 0.75% for 61-90 days; and 1.0% thereafter); provided, that the aggregate amount of liquidated damages payable by LRLP under the Registration Rights Agreement to each Purchaser shall not exceed 10.0% of the Liquidated Damages Amount with respect to such Purchaser. The Registration Rights Agreement also provides for the payment of liquidated damages in the event LRLP suspends the use of the shelf registration statement in excess of permitted periods. The Registration Rights Agreement also gives certain Purchasers piggyback registration rights with other shelf registration statements under certain circumstances.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Cautionary Statement Regarding Forward Looking Information

 This document contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control, which may include statements about our:

      •           business strategy;

      •           financial strategy;

      •           drilling locations;

      •           oil and natural gas reserves;

      •           technology;

      •           realized oil and natural gas prices;

      •           production volumes;

      •           lease operating expenses, general and administrative costs and finding and development costs;

      •           future operating results; and

      •           plans, objectives, expectations and intentions.

 All of these types of statements, other than statements of historical fact included in this document, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology.

 The forward-looking statements contained in this document are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. All readers are cautioned that the forward-looking statements contained in this document are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to factors described in Legacy’s Annual Report on Form 10-K for the year ended December 31, 2006 in Item 1A under “Risk Factors.” The forward-looking statements in this document speak only as of the date of this document; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Overview

We were formed in October 2005. Upon completion of our private equity offering and as a result of the related Legacy Formation on March 15, 2006, we acquired oil and natural gas properties and business operations from our Founding Investors and three charitable foundations. Although we were the surviving entity for legal purposes, the formation transactions are treated as a purchase with Moriah Properties, Ltd. and its affiliates, or the Moriah Group, being considered, on a combined basis, as the acquiring entity for accounting purposes. Therefore, the accounts reflected in our historical financial statements prior to March 15, 2006 are those of the Moriah Group.

On January 18, 2007, we closed our IPO of 6,900,000 units representing limited partner interests at an IPO price of $19.00 per unit. Net proceeds to the partnership after underwriting discounts and estimated offering expenses were approximately $122 million, all of which were used to repay the $115.8 million of indebtedness outstanding under our credit facility and for general partnership purposes.

The Moriah Group owned and operated oil and natural gas producing properties located primarily in the Permian Basin of West Texas and southeast New Mexico. The Moriah Group included the accounts of Moriah Resources, Inc. as the general partner of Moriah Properties, Ltd., the oil and natural gas interests individually owned by Dale A. and Rita Brown until October 1, 2005 when those interests were transferred to DAB Resources, Ltd., DAB Resources, Ltd. and the accounts of MBN Properties LP. The Moriah Group consolidated MBN Properties LP as a variable interest entity with the portion of net income (loss) applicable to the other owners’ equity interests eliminated through a non-controlling interest adjustment. Although MBN Management, LLC, the general partner of MBN Properties LP, is also a variable interest entity, it was accounted for by the Moriah Group using the equity method.

Page 23

Because of our rapid growth through acquisitions and development of properties, historical results of operations and period-to-period comparisons of these results and certain financial data may not be meaningful or indicative of future results.

The operating results of the properties acquired in the Legacy Formation are included in the results of operations from March 15, 2006, the operating results of the South Justis Unit properties and the Farmer Field properties acquired on June 29, 2006 have been included from July 1, 2006, the operating results of the Kinder Morgan properties have been included from August 1, 2006, the operating results of the Binger properties have been included from April 16, 2007, the operating results of the Ameristate properties have been included from May 1, 2007, the operating results of the TSF properties have been included from May 25, 2007, the operating results of the Raven Shenandoah properties have been included from May 31, 2007 and the operating results of the Raven OBO properties have been included from August 3, 2007.

Acquisitions have been financed with a combination of proceeds from bank borrowings, issuances of units and cash flow from operations. Post-acquisition activities are focused on evaluating and exploiting the acquired properties and evaluating potential add-on acquisitions.

Our revenues, cash flow from operations and future growth depend substantially on factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy. Oil and natural gas prices historically have been volatile and may fluctuate widely in the future.

Sustained periods of low prices for oil or natural gas could materially and adversely affect our financial position, our results of operations, the quantities of oil and natural gas reserves that we can economically produce and our access to capital.

Higher oil and natural gas prices have led to higher demand for drilling rigs, operating personnel and field supplies and services, and have caused increases in the costs of those goods and services. To date, the higher sales prices have more than offset the higher drilling and operating costs. Given the inherent volatility of oil and natural gas prices, which are influenced by many factors beyond our control, we plan our activities and budget based on sales price assumptions which historically have been lower than the average sales prices received. We focus our efforts on increasing oil and natural gas production and reserves while controlling costs at a level that is appropriate for long-term operations.

 We face the challenge of natural production declines. As initial reservoir pressures are depleted, oil and natural gas production from a given well or formation decreases. We attempt to overcome this natural decline by utilizing multiple types of recovery techniques such as secondary (waterflood) and tertiary (CO2) recovery methods to repressure the reservoir and recover additional oil, drilling to find additional reserves, restimulating existing wells and acquiring more reserves than we produce. Our future growth will depend on our ability to continue to add reserves in excess of production. We will maintain our focus on adding reserves through acquisitions and exploitation projects. Our ability to add reserves through acquisitions and exploitation projects is dependent upon many factors including our ability to raise capital, obtain regulatory approvals and contract drilling rigs and personnel.

Our revenues are highly sensitive to changes in oil and natural gas prices and to levels of production. As set forth under “Cash Flow from Operations” below, we have hedged a significant portion of our expected production, which allows us to mitigate, but not eliminate, oil and natural gas price risk. We continuously conduct financial sensitivity analyses to assess the effect of changes in pricing and production. These analyses allow us to determine how changes in oil and natural gas prices will affect our ability to execute our capital investment programs and to meet future financial obligations. Further, the financial analyses allow us to monitor any impact such changes in oil and natural gas prices may have on the value of our proved reserves and their impact, if any, on any redetermination to our borrowing base under our credit facility.

Legacy does not specifically designate derivative instruments as cash flow hedges; therefore, the mark-to-market adjustment reflecting the unrealized gain or loss associated with these instruments is recorded in current earnings.

Production and Operating Costs Reporting

We strive to increase our production levels to maximize our revenue and cash available for distribution. Additionally, we continuously monitor our operations to ensure that we are incurring operating costs at the optimal level. Accordingly, we continuously monitor our production and operating costs per well to determine if any wells or properties should be shut in, recompleted or sold.

Such costs include, but are not limited to, the cost of electricity to lift produced fluids, chemicals to treat wells, field personnel to monitor the wells, well repair expenses to restore production, well workover expenses intended to increase production and ad valorem taxes. We incur and separately report severance taxes paid to the states and counties in which our properties are located. These taxes are reported as production taxes and are a percentage of oil and natural gas revenue. Ad valorem taxes are a percentage of property valuation. Gathering and transportation costs are generally borne by the purchasers of our oil and natural gas as the price paid for our products reflects these costs.

Page 24

Operating Data

The following table sets forth selected financial and operating data of Legacy for the periods indicated.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2007			2006 (a)			2007
Revenues:
Oil sales	$	13,204,380		$	22,441,858		$	32,443,950		$	51,396,169
Natural gas liquid sales		-			1,713,657			-			2,890,994
Natural gas sales		4,238,937			5,240,788			10,822,193			13,776,326
Realized gain (loss) on oil swaps		(5,798,140	)		(845,744	)		(6,897,833	)		1,198,916
Realized loss on natural gas liquid swaps		-			(118,044	)		-			(159,395	)
Realized gain on natural gas swaps		1,669,838			1,372,154			4,715,768			3,196,205
Unrealized gain (loss) on oil swaps		19,770,172			(7,677,256	)		1,342,276			(20,860,444	)
Unrealized loss on natural gas liquid swaps		-			(650,285	)		-			(940,557	)
Unrealized gain (loss) on natural gas swaps		2,963,768			1,483,423			6,373,342			(2,586,381	)
Total revenue	$	36,048,955		$	22,960,551		$	48,799,696		$	47,911,833
Expenses:
Oil and natural gas production	$	4,166,766		$	7,580,473		$	10,159,887		$	18,408,152
Production and other taxes	$	1,029,511		$	1,886,122		$	2,710,392		$	4,360,881
General and administrative	$	1,186,884		$	1,443,190		$	3,265,163		$	6,039,371
Depletion, depreciation, amortization  and accretion	$	5,346,432		$	6,959,351		$	12,701,726		$	19,065,064
Production:
Oil - barrels		202,952			312,433			516,057			813,906
Natural gas liquids - gallons		-			1,344,553			-			2,303,892
Natural gas - Mcf		571,246			800,936			1,598,909			2,107,376
Total (Boe)		298,160			477,936			782,542			1,219,990
Average daily production (Boe/d)		3,241			5,195			2,866			4,469
Average sales price per unit (including hedges) (b):
Oil price per barrel	$	133.91		$	44.55		$	52.10		$	38.99
Natural gas liquid price per gallon	$	-		$	0.70		$	-		$	0.78
Natural gas price per Mcf	$	15.53		$	10.11		$	13.70		$	6.83
Combined (per Boe)	$	120.90		$	48.04		$	62.36		$	39.27
Average sales price per unit (including realized hedge gains/losses) (c):
Oil price per barrel	$	36.49		$	69.12		$	49.50		$	64.62
Natural gas liquid price per gallon	$	-		$	1.19		$	-		$	1.19
Natural gas price per Mcf	$	10.34		$	8.26		$	9.72		$	8.05
Combined (per Boe)	$	44.66		$	62.36		$	52.50		$	59.26
Average sales price per unit (excluding hedges):
Oil price per barrel	$	65.06		$	71.83		$	62.87		$	63.15
Natural gas liquid price per gallon	$	-		$	1.27		$	-		$	1.25
Natural gas price per Mcf	$	7.42		$	6.54		$	6.77		$	6.54
Combined (per Boe)	$	58.50		$	61.51		$	55.29		$	55.79
NYMEX oil index prices per barrel:
Beginning of Period	$	73.93		$	70.68		$	61.04		$	61.05
End of Period	$	62.91		$	81.66		$	62.91		$	81.66
NYMEX gas index prices per Mcf:
Beginning of Period	$	6.10		$	6.77		$	11.18		$	6.30
End of Period	$	5.62		$	6.87		$	5.62		$	6.87
Average unit costs per Boe:
Production costs, excluding production and other taxes	$	13.97		$	15.86		$	12.98		$	15.09
Production and other taxes	$	3.45		$	3.95		$	3.46		$	3.57
General and administrative	$	3.98		$	3.02		$	4.17		$	4.95
Depletion, depreciation, amortization and accretion	$	17.93		$	14.56		$	16.23		$	15.63

(a)	Reflects the production and operating results of the oil and natural gas properties acquired in the March 15, 2006 formation transaction.
(b)	Includes both the realized and unrealized hedge gains and losses from Legacy’s oil and natural gas swaps. Since Legacy does not specifically designate its commodity derivative instruments as cash flow hedges, current earnings reflect a mark-to-market adjustment for commodity derivatives which will be settled in future periods.
(c)	Includes only the realized hedge gains (losses) from Legacy’s oil and natural gas swaps.

Page 25

Results of Operations

Three-Month Period Ended September  30, 2007 Compared to Three-Month Period Ended September 30, 2006

Legacy’s revenues from the sale of oil were $22.4 million and $13.2 million for the three-month periods ended September 30, 2007 and 2006, respectively. Legacy’s revenues from the sale of natural gas liquids were $1.7 million and $0 for the three-month periods ended September 30, 2007 and 2006, respectively. Legacy’s revenues from the sale of natural gas were $5.2 million and $4.2 million for the three-month periods ended September 30, 2007 and 2006, respectively. The $9.2 million increase in oil revenues reflects an increase in oil production of 109 MBbls (54%) due primarily to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions and the increase in realized price excluding the effects of hedging of $6.77 per Bbl. The $1.7 million increase in natural gas liquids is due primarily to the Binger acquisition in 2007. The $1.0 million increase in natural gas revenues reflects an increase in natural gas production of approximately 230 MMcf (40%) due primarily to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions, while the realized price per Mcf excluding the effects of hedging decreased $0.88 per Mcf.

For the three-month period ended September 30, 2007, Legacy recorded $6.4 million of net losses on oil and natural gas swaps comprised of realized gains of $0.4 million from net cash settlements of oil and natural gas swap contracts and net unrealized losses of $6.8 million. Legacy had unrealized net losses from oil swaps because the fixed prices of its oil swap contracts were below the NYMEX index prices at September 30, 2007. As a point of reference, the NYMEX price for light sweet crude oil for the near-month close at September 30, 2007 was $81.66 per Bbl, a price which is greater than the average contract prices of Legacy’s outstanding oil swap contracts. Due to the increase in oil prices during the quarter, the differential between Legacy’s fixed price oil swaps and NYMEX increased, resulting in losses for the quarter. Legacy had unrealized net losses from natural gas liquids swaps because the fixed prices of its natural gas liquids swap contracts were below the NYMEX index prices at September 30, 2007. Legacy had unrealized net gains from natural gas swaps because the fixed prices of its natural gas swap contracts were above the NYMEX index prices at September 30, 2007. In addition, the NYMEX price for natural gas for the near-month close at September 30, 2007 was $6.87 per MMbtu, a price which is less than the average contract prices of Legacy’s outstanding natural gas swap contracts. Due to the addition of natural gas swap contracts during the quarter at prices greater than the NYMEX natural gas price at September 30, 2007, the increase in natural gas prices during the quarter did not result in unrealized losses for the quarter. For the three-month period ended September 30, 2006, Legacy recorded $18.6 million of net gains on oil and natural gas swaps comprised of a realized loss of $5.8 million from net cash settlements of oil swap contracts, a realized gain of $1.7 million from net cash settlements of natural gas swap contracts, a net unrealized gain of $19.8 million on oil swap contracts, due to the decrease in oil prices during the quarter which increased the differential between the NYMEX oil index price and our fixed price oil swaps, and a net unrealized gain of $3.0 million on natural gas swap contracts, due to the decrease in natural gas prices which increased the differential between the NYMEX natural gas index price and our fixed price natural gas swaps. Unrealized gains and losses represent a current period mark-to-market adjustment for commodity derivatives which will be settled in future periods.

           Legacy’s oil and natural gas production expenses, excluding production and other taxes, increased to $7.6 million ($15.86 per Boe) for the three-month period ended September 30, 2007, from $4.2 million ($13.97 per Boe) for the three month period ended September 30, 2006. Production expenses increased primarily because of (i) $1.8 million related to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions, (ii) $0.3 million related to increases in ad valorem expenses from increased well counts and periods of ownership. In addition, the increase in production costs per Boe is consistent with industry-wide costs increases, particularly those related to oil operations that require lifting produced oil and water or involve enhanced recovery projects. Due to the rising oil and natural gas prices subsequent to September 30, 2007, Legacy believes production expenses could continue to rise in the fourth quarter, to the extent that production costs correlate to oil and natural gas prices.

Legacy’s production and other taxes were $1.9 million and $1.0 million for the three-month periods ended September 30, 2007 and 2006, respectively. Production and other taxes increased primarily because of approximately $0.5 million of taxes related to the Binger, Ameristate, TSF Raven Shenandoah and Raven OBO acquisitions. The increase in production and other taxes per Boe is primarily due to the increase in realized prices excluding the effects of oil and natural gas swaps. As production and other taxes are a function of price and volume, the increase in cost per unit  is consistent with the increase in realized prices.

Legacy’s general and administrative expenses were $1.4 million and $1.2 million for the three-month periods ended September 30, 2007 and 2006, respectively. General and administrative expenses increased approximately $256,000 between periods primarily due to increased employee costs related to business expansion.

Legacy’s depletion, depreciation, amortization and accretion expense, or DD&A, was $6.9 million and $5.3 million for the three-month periods ended September 30, 2007 and 2006, respectively, reflecting primarily $1.7 million of DD&A related to recent acquisitions. In addition, the decrease in DD&A expense per Boe, from $17.93 to $14.56 for the three-month periods ended September 30, 2006 and 2007, respectively, reflects the higher cost basis of the producing oil and natural gas properties acquired in the Legacy Formation relative to the cost basis of recent acquisitions.

Impairment expense was $950,174 for the three-month period ended September 30, 2007 involving seventeen separate producing fields. The impairment is primarily due to additional costs incurred during the quarter ended September 30, 2007 on fields from which the future estimated production revenues did not exceed these costs. Impairment expense was $8.6 million for the three-month period ended September 30, 2006, involving 22 separate producing fields, due primarily to the decline in natural gas prices from the dates at which the purchase prices for the PITCO acquisition and the Legacy Formation were allocated among the purchased properties.

Legacy recorded interest income of $54,285 for the three-month period ended September 30, 2007 and $55,226 for the three-month period ended September 30, 2006. The decrease of $941 is a result of lower average cash balances for the current period.

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Interest expense was $1.9 million for each of the three-month periods ended September 30, 2007 and 2006, reflecting lower average borrowings and higher average interest rates in the current period. For example, the average debt balance outstanding was $83 million and $98 million for the three month periods ended September 30, 2007 and 2006, respectively. In addition, Legacy incurred $275,000 in non-cash interest expense related to the mark-to-market of its interest rate swaps for the three-month period ended September 30, 2007.

Legacy recognized $29,690 in income from non-controlling interest of Binger Operations, LLC (“BOL”) for the three-month period ended September 30, 2007. This income is primarily derived from BOL’s less than 1% interest in the Binger Unit.

Nine-Month Period Ended September 30, 2007 Compared to Nine-Month Period Ended September 30, 2006

Legacy’s revenues from the sale of oil were $51.4 million and $32.4 million for the nine-month periods ended September 30, 2007 and 2006, respectively. Legacy’s revenues from the sale of natural gas liquids were $2.9 million for the nine-month period ended September 30, 2007. Legacy’s revenues from the sale of natural gas were $13.8 million and $10.8 million for the nine-month periods ended September 30, 2007 and 2006, respectively. The $19.0 million increase in oil revenues reflects an increase in oil production of 298 MBbls (58%) due primarily to the Binger, Ameristate, TSF, Raven Shenandoah, Raven OBO, Kinder Morgan, Larron and South Justis acquisitions, and the increase in the realized price excluding the effects of hedging of $0.28 per Bbl. The $2.9 million in natural gas liquids is due primarily to the Binger acquisition in 2007. The $3.0 million increase in natural gas revenues reflects an increase in natural gas production of approximately 508 MMcf (32%) due primarily to the Binger, Ameristate, TSF, Raven OBO, Raven Shenandoah, Kinder Morgan, Larron and South Justis acquisitions, while the realized price per Mcf excluding the effects of hedging decreased $0.23 per Mcf.

For the nine-month period ended September 30, 2007, Legacy recorded $20.2 million of net losses on oil and natural gas swaps comprised of realized gains of $4.2 million from net cash settlements of oil, natural gas liquids and natural gas swap contracts and net unrealized losses of $24.4 million. Legacy had unrealized net losses from its oil swaps because the fixed prices of its oil swap contracts were below the NYMEX index prices at September 30, 2007. As a point of reference, the NYMEX price for light sweet crude oil for the near-month close at September 30, 2007 was $81.66 per Bbl, a price which is greater than the average contract prices of Legacy’s outstanding oil swap contracts. Due to the increase in oil prices during the nine-month period ended September 30, 2007, the differential between Legacy’s fixed price oil swaps and NYMEX increased, resulting in unrealized losses for the nine-month period ended September 30, 2007. Legacy had unrealized net losses from its natural gas liquid swaps because the fixed prices of its natural gas liquid swap contracts during the nine-month period ended September 30, 2007, were below the NYMEX index prices during that timeframe. Legacy had unrealized net losses from its natural gas swaps because the fixed prices of its natural gas swap contracts during the nine-month period ended September 30, 2007 were below the NYMEX index prices during that timeframe. In addition, the NYMEX price for natural gas for the near-month close at September 30, 2007 was $6.87 per MMbtu, a price which is less than the average contract prices of Legacy’s outstanding natural gas swap contracts. For the nine-month period ended September 30, 2006, Legacy recorded $5.5 million of net gains on oil and natural gas swaps comprised of a realized loss of $6.9 million from net cash settlements of oil swap contracts, a realized gain of $4.7 million from net cash settlements of natural gas swap contracts, a net unrealized gain of $1.3 million on oil swap contracts, due to the increase in oil prices during the nine-month period ended September 30, 2007 which increased the differential between the NYMEX oil index price and our fixed price oil swaps, and a net unrealized gain of $6.4 million on natural gas swap contracts, due to the decrease in natural gas prices which increased the differential between the NYMEX natural gas index price and our fixed price natural gas swaps. Unrealized gains and losses represent a current period mark-to-market adjustment for commodity derivatives which will be settled in future periods.

Legacy’s oil and natural gas production expenses, excluding production and other taxes, increased to $18.4 million ($15.09 per Boe) for the nine-month period ended September 30, 2007, from $10.2 million ($12.98 per Boe) for the nine-month period ended September 30, 2006. Production expenses increased primarily because of (i) $2.8 million related to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions, (ii) $0.8 million related to increases in ad valorem expenses from increased well counts and periods of ownership, (iii) $1.3 million related to the Legacy Formation and (iv) $1.6 million related to the South Justis, Farmer Field and Kinder Morgan acquisitions. In addition, the increase in production costs per Boe is consistent with industry-wide costs increases, particularly those related to oil operations that require lifting produced oil and water or involve enhanced recovery projects. Due to the rising oil and natural gas prices subsequent to September 30, 2007, Legacy believes production expenses could continue to rise in the fourth quarter, to the extent that production costs correlate to oil and natural gas prices.

Legacy’s production and other taxes were $4.4 million and $2.7 million for the nine-month periods ended September 30, 2007 and 2006, respectively. Production and other taxes increased primarily because of approximately $0.3 million of taxes related to the Legacy Formation and $0.8 million related to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions. The increase in production and other taxes per Boe is primarily due to the increase in realized prices excluding hedges. As production and other taxes are a function of price and volume, the increase in unit cost is consistent with the increase in realized prices.

Legacy’s general and administrative expenses were $6.0 million and $3.3 million for the nine-month periods ended September 30, 2007 and 2006, respectively. General and administrative expenses increased approximately $2.7 million between periods primarily due to increased employee costs related to business expansion, $0.9 million of costs incurred in connection with awards granted under the LTIP due to a $0.6 million non-cash expense related to the change in estimated fair value of the unit-based compensation liability related to unit options and unit appreciation rights and $0.3 million of cash payments to employees exercising unit options and approximately $0.5 million of costs incurred in connection with the preparation of the 2006 federal income tax return and related Form K-1’s.

Legacy’s depletion, depreciation, amortization and accretion expense, or DD&A, was $19.1 million and $12.7 million for the nine-month periods ended September 30, 2007 and 2006, respectively, reflecting primarily (i) $2.7 million of DD&A related to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions, (ii) $1.1 million of DD&A related to the Legacy Formation and (iii) $1.6 million related to the South Justis, Farmer Field and Kinder Morgan acquisitions. In addition, the decrease in DD&A expense per Boe, from $16.23 to $15.63 for the nine-month periods ended September 30, 2006 and 2007, respectively, reflects the higher cost basis of the producing oil and natural gas properties acquired in the Legacy Formation relative to the cost basis of recent acquisitions.

Impairment expense was $1.2 million for the nine-month period ended September 30, 2007 involving thirty separate producing fields. The impairment is primarily due to additional costs incurred during the nine months ended September 30, 2007 on fields from which the future estimated production revenues did not exceed these costs. Impairment expense was $8.6 million for the nine-month period ended September 30, 2006, involving 22 separate producing fields, due primarily to the decline in natural gas prices from the dates at which the purchase prices for the PITCO acquisition and the Legacy Formation were allocated among the purchased properties.

Legacy recorded interest income of $205,443 for the nine-month period ended September 30, 2007 and $93,659 for the nine-month period ended September 30, 2006. The increase of $111,784 is a result of higher average cash balances in the current period.

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Interest expense was $3.4 million and $4.5 million for the nine-month periods ended September 30, 2007 and 2006, respectively, reflecting lower average borrowings and higher average interest rates in the current period. For example, the average debt balance outstanding was $50.2 million and $59.6 million for the nine month periods ended September 30, 2007 and 2006, respectively. In addition, Legacy incurred $275,000 in non-cash interest expense related to the mark-to-market on its interest rate swaps for the nine-month period ended September 30, 2007.

Legacy recorded equity in loss of partnership of $317,788 for the nine-month period ended September 30, 2006. The recorded equity in loss of partnership was related to Legacy’s investment in MBN Management, LLC, which was formed in July 2005. Legacy did not acquire any interest in MBN Management, LLC as part of the Legacy Formation. Accordingly, no such loss was incurred in the current period.

Legacy recognized $40,600 in income from non-controlling interest of BOL for the nine-month period ended September 30, 2007. This income is primarily derived from BOL’s less than 1% interest in the Binger Unit.

Capital Resources and Liquidity

Legacy’s primary sources of capital and liquidity have been bank borrowings, cash flow from operations, its private offering in March 2006 and the IPO in January 2007. To date, Legacy’s primary use of capital has been for acquisitions, repayment of bank borrowings and exploitation of oil and natural gas properties.

As we pursue growth, we continually monitor the capital resources available to us to meet our future financial obligations and planned capital expenditures. Our future success in growing reserves and production will be highly dependent on capital resources available to us and our success in acquiring and exploiting additional reserves. We actively review acquisition opportunities on an ongoing basis. If we were to make significant additional acquisitions for cash, we would need to borrow additional amounts under our credit facility, if available, or obtain additional debt or equity financing. Our credit facility imposes certain restrictions on our ability to obtain additional debt financing. Based upon current oil and natural gas price expectations for the year ending December 31, 2007, we anticipate that our cash on hand, cash flow from operations and available borrowing capacity under our credit facility will provide us sufficient working capital to meet our planned capital expenditures of $12.5 million and planned cash distributions of $40.4 million, which reflects the $7.6 million of distributions paid in the first quarter of 2007, $10.7 million paid in the second quarter of 2007, $10.9 million paid in  the third quarter of 2007 and $11.2 million of planned distributions in the fourth quarter of 2007. Please read “— Financing Activities — Our Revolving Credit Facility.”

On October 24, 2007, Legacy’s bank group increased Legacy’s borrowing base to $225 million as part of the Third Amendment to the Credit Agreement.

Cash Flow from Operations

Legacy’s net cash provided by operating activities was $33.3 million and $21.8 million for the nine-month periods ended September 30, 2007 and 2006, respectively, with the 2007 period being favorably impacted by higher sales volumes, offset by the higher working capital needs of our growing business.

Our cash flow from operations is subject to many variables, the most significant of which is the volatility of oil and natural gas prices. Oil and natural gas prices are determined primarily by prevailing market conditions, which are dependent on regional and worldwide economic activity, weather and other factors beyond our control. Our future cash flow from operations will depend on our ability to maintain and increase production through acquisitions and exploitation projects, as well as the prices of oil and natural gas.

We enter into oil and natural gas derivative contracts to reduce the impact of oil and natural gas price volatility on our operations. Currently, we use swaps, based on a NYMEX pricing index, to reduce our exposure to changes in oil, natural gas liquids and natural gas prices, which do not include the additional net discount that we typically experience in the Permian Basin. At September 30, 2007, we had in place oil, natural gas liquids and natural gas swaps covering significant portions of our estimated 2007 through 2011 oil and natural gas production. We have swap contracts covering approximately 77% of our remaining expected oil, natural gas liquid and natural gas production for 2007. We also have swap contracts covering approximately 67% of our currently expected oil and natural gas production for 2008 through 2010 from existing estimated total proved reserves.

By reducing the cash flow effects of price volatility from a significant portion of our oil and natural gas production, we have mitigated, but not eliminated, the potential effects of changing prices on our cash flow from operations for those periods. While mitigating negative effects of falling commodity prices, these derivative contracts also limit the benefits we would receive from increases in commodity prices. It is our policy to enter into derivative contracts only with counterparties that are major, creditworthy financial institutions deemed by management as competent and competitive market makers.

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           The following tables summarize, for the periods indicated, our oil and natural gas swaps currently in place through December 31, 2012. We use swaps as our mechanism for offsetting the cash flow effects of changes in commodity prices whereby we pay the counterparty floating prices and receive fixed prices from the counterparty, which serves to reduce the effects on cash flow of the floating prices we are paid by purchasers of our oil and natural gas. These transactions are settled based upon the NYMEX price of oil at Cushing, Oklahoma, and NYMEX price of natural gas at Henry Hub and ANR-OK on the average of the three final trading days of the month and settlement occurs on the fifth day of the production month.

	Annual	Average	Price
Calendar Year	Volumes (Bbls)	Price per Bbl	Range per Bbl
2007	273,578	$                 68.81	$64.15 - $75.70
2008	1,025,249	$                 68.57	$62.25 - $73.45
2009	948,013	$                 66.65	$61.05 - $71.40
2010	883,445	$                 65.26	$60.15 - $71.15
2011	665,040	$                 70.17	$67.33 - $71.40
2012	549,600	$                 70.04	$67.72 - $71.15

	Annual	Average	Price
Calendar Year	Volumes (MMBtu)	Price per MMBtu	Range per MMBtu
2007	656,192	$                   8.59	$6.85 - $10.01
2008	2,402,970	$                   8.17	$6.85 - $10.58
2009	2,217,470	$                   8.01	$6.85 - $10.18
2010	1,962,755	$                   7.74	$6.85 - $9.73
2011	694,024	$                   7.21	$6.85 - $7.51
2012	404,436	$                   7.07	$6.85 -  $7.30

In July 2006, we entered into basis swaps to receive floating NYMEX prices less a fixed basis differential and pay prices based on the floating Waha index, a natural gas hub in West Texas. The prices that we receive for our natural gas sales follow Waha more closely than NYMEX. The basis swaps thereby provide a better match between our natural gas sales and the settlement payments on our natural gas swaps. The following table summarizes, for the periods indicated, our NYMEX basis swaps currently in place through December 31, 2010.

	Annual	Basis
Calendar Year	Volumes (Mcf)	Differential per Mcf
2007	390,000	($0.88)
2008	1,422,000	($0.84)
2009	1,320,000	($0.68)
2010	1,200,000	($0.57)

On March 30, 2007, we entered into natural gas liquids swaps to hedge the impact of volatility in the spot prices of natural gas liquids. On September 7, 2007, we entered into additional natural gas liquids swaps for the fourth quarter of 2007 and calendar year 2008. These swaps hedge the spot prices for ethane, propane, iso-butane, normal butane and natural gasoline tracked on the Mont Belvieu, Non-Tet OPIS exchange. We entered into these swaps as anticipatory asset hedges related to our acquisition of the East Binger (Marchand) Unit in Caddo County, Oklahoma.  The following table summarizes, for the periods indicated, our Mont Belvieu, Non-Tet Opis natural gas liquids swaps currently in place through December 31, 2009.

	Annual	Average	Price
Calendar Year	Volumes (Gal)	Price per Gal	Range per Gal
2007	1,682,838	$                   1.32	$0.79 - $1.68
2008	6,458,004	$                   1.27	$0.66 - $1.62
2009	2,265,480	$                   1.15	$1.15

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Investing Activities — Acquisitions and Capital Expenditures

Legacy’s cash capital expenditures were $98.3 million for the nine-month period ended September 30, 2007. The total includes $88.0 million for acquisition of oil and natural gas properties in five acquisitions and $10.3 million of exploitation projects.

Legacy’s cash capital expenditures were $45.4 million for the nine-month period ended September 30, 2006. The total includes $7.7 million paid to three charitable foundations in the Legacy Formation for oil and natural gas properties, $8.8 million, $5.6 million and $17.2 million for the purchase of oil and natural gas properties in the South Justis Unit from Henry Holding LP, the Farmer Field from Larron Oil Corporation and various oil and natural gas properties from Kinder Morgan, respectively, and $7.0 million of capitalized operating rights related to the South Justis Unit.

We currently anticipate that our drilling budget, which predominantly consists of drilling, recompletion and refracture stimulation projects and one tertiary (CO2) recovery project, will be $12.5 million for the year ending December 31, 2007. Our borrowing capacity under our revolving credit facility is $59.7 million as of November 9, 2007. The amount and timing of our capital expenditures is largely discretionary and within our control, with the exception of certain projects managed by other operators. If oil and natural gas prices decline below levels we deem acceptable, we may defer a portion of our planned capital expenditures until later periods. Accordingly, we routinely monitor and adjust our capital expenditures in response to changes in oil and natural gas prices, drilling and acquisition costs, industry conditions and internally generated cash flow. Matters outside our control that could affect the timing of our capital expenditures include obtaining required permits and approvals in a timely manner and the availability of rigs and labor crews. Based upon current oil and natural gas price expectations for the year ending December 31, 2007, we anticipate that we will have sufficient sources of working capital, including our cash flow from operations and available borrowing capacity under our credit facility, to meet our cash obligations including our planned capital expenditures of $12.5 million and planned cash distributions of $40.4 million for the year ending December 31, 2007. However, future cash flows are subject to a number of variables, including the level of oil and natural gas production and prices. There can be no assurance that operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures.

Financing Activities

Initial Public Offering

On January 18, 2007, Legacy completed its IPO of 6,900,000 units at an IPO price of $19.00 per unit. Net proceeds to Legacy after underwriting discounts and estimated offering expenses were approximately $122 million, all of which were used to repay in full the indebtedness outstanding under Legacy’s credit facility and for general partnership purposes.

Our Revolving Credit Facility

At the closing of our private equity offering on March 15, 2006, we entered into a new, four-year, $300 million revolving credit facility with BNP Paribas as administrative agent. On October 24, 2007, the maximum credit amount was increased to $500 million as part of the Third Amendment to the credit agreement. Our obligations under the credit facility are secured by mortgages on more than 80% of our oil and gas properties as well as a pledge of all of our ownership interests in our operating subsidiaries. The amount available for borrowing at any one time is limited to the borrowing base, which was initially set at $130 million and was increased on October 24, 2007 to $225 million. The borrowing base is subject to semi-annual re-determinations on April 1 and October 1 of each year. Additionally, either Legacy or the lenders may, once during each calendar year, elect to re-determine the borrowing base between scheduled re-determinations. We also have the right, once during each calendar year, to re-determine the borrowing base upon the proposed acquisition of certain oil and gas properties where the purchase price is greater than 10% of the borrowing base. Any increase in the borrowing base requires the consent of all the lenders and any decrease in the borrowing base must be approved by the lenders holding 66 2/3 % of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the credit facility. If the required lenders do not agree on an increase or decrease, then the borrowing base will be the highest borrowing base acceptable to the lenders holding 66 2/3 % of the outstanding aggregate principal amounts of the loans or participation interests in letters of credit issued under the credit facility so long as it does not increase the borrowing base then in effect. Outstanding borrowings in excess of the borrowing base must be prepaid, and, if mortgaged properties represent less than 80% of total value of oil and gas properties evaluated in the most recent reserve report, we must pledge other oil and natural gas properties as additional collateral.

We may elect that borrowings be comprised entirely of alternate base rate (ABR) loans or Eurodollar loans. Interest on the loans is determined as follows:

•  with respect to ABR loans, the alternate base rate equals the higher of the prime rate or the Federal funds effective rate plus 0.50%, plus an applicable margin between 0% and 0.250%, or

•  with respect to any Eurodollar loans for any interest period, the London interbank rate, or LIBOR plus an applicable margin between 1.00% and 1.75% per annum.

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Interest is generally payable quarterly for ABR loans and on the last day of the applicable interest period for any Eurodollar loans.

Our revolving credit facility also contains various covenants that limit our ability to:

•  incur indebtedness;

•  enter into certain leases;

•  grant certain liens;

•  enter into certain swaps;

•  make certain loans, acquisitions, capital expenditures and investments;

•  make distributions other than from available cash;

•  merge, consolidate or allow any material change in the character of its business; or

•  engage in certain asset dispositions, including a sale of all or substantially all of our assets.

 Our credit facility also contains covenants that, among other things, require us to maintain specified ratios or conditions as follows:

•  consolidated net income plus interest expense, income taxes, depreciation, depletion, amortization and other similar charges excluding unrealized gains and losses under SFAS No. 133, minus all non-cash income added to consolidated net income, and giving pro forma effect to any acquisitions or capital expenditures, to interest expense of not less than 2.5 to 1.0; and

•  consolidated current assets, including the unused amount of the total commitments, to consolidated current liabilities of not less than 1.0 to 1.0, excluding non-cash assets and liabilities under SFAS No. 133, which includes the current portion of oil, natural gas and interest rate swaps.

If an event of default exists under our revolving credit facility, the lenders will be able to accelerate the maturity of the credit agreement and exercise other rights and remedies. Each of the following would be an event of default:

•  failure to pay any principal when due or any reimbursement amount, interest, fees or other amount within certain grace periods;

•  a representation or warranty is proven to be incorrect when made;

•  failure to perform or otherwise comply with the covenants or conditions contained in the credit agreement or other loan documents, subject, in certain instances, to certain grace periods;

•  default by us on the payment of any other indebtedness in excess of $1.0 million, or any event occurs that permits or causes the acceleration of the indebtedness;

•  bankruptcy or insolvency events involving us or any of our subsidiaries;

•  the loan documents cease to be in full force and effect as a result of our failing to create a valid lien, except in limited circumstances;

•  a change of control, which will occur upon (i) the acquisition by any person or group of persons of beneficial ownership of more than 35% of the aggregate ordinary voting power of our equity securities, (ii) the first day on which a majority of the members of the board of directors of our general partner are not continuing directors (which is generally defined to mean members of our board of directors as of March 15, 2006 and persons who are nominated for election or elected to our general partner’s board of directors with the approval of a majority of the continuing directors who were members of such board of directors at the time of such nomination or election), (iii) the direct or indirect sale, transfer or other disposition in one or a series of related transactions of all or substantially all of the properties or assets (including equity interests of subsidiaries) of us and our subsidiaries to any person, (iv) the adoption of a plan related to our liquidation or dissolution or (v) Legacy Reserves GP, LLC ceasing to be our sole general partner;

•  the entry of, and failure to pay, one or more adverse judgments in excess of $1.0 million or one or more non-monetary judgments that could reasonably be expected to have a material adverse effect and for which enforcement proceedings are brought or that are not stayed pending appeal; and

•  specified ERISA events relating to our employee benefit plans that could reasonably be expected to result in liabilities in excess of $1,000,000 in any year.

 At September 30, 2007, Legacy was in compliance with all financial and other covenants of the Legacy Facility.

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Legacy entered into a Unit Purchase Agreement (the “Purchase Agreement”), dated effective as of November 7, 2007, with Legacy Reserves GP, LLC and certain institutional investors (the “Purchasers”) to sell an aggregate of 3,642,369 units representing limited partner interests in LRLP (the “Units”) in a private placement (the “Private Placement”). The negotiated purchase price for the Units in the Purchase Agreement was $20.50 per unit, or approximately $75 million in the aggregate.

The Private Placement closed, and 3,642,369 Units were issued, on November 8, 2007. LRLP will use the net proceeds from the Private Placement primarily to reduce debt currently outstanding under the Legacy Facility.  The borrowings were used to finance the acquisition of properties in the Texas Panhandle and Permian Basin which closed during October 2007 for approximately $74 million.  The Private Placement pursuant to the Purchase Agreement is being made in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

In connection with the Purchase Agreement, LRLP also entered into a Registration Rights Agreement dated November 8, 2007 (the “Registration Rights Agreement”) with the Purchasers. The Registration Rights Agreement requires LRLP to file a shelf registration statement with the Securities and Exchange Commission (“SEC”) to register the Units as soon as practicable after the closing date of the Private Placement, but in any event within 90 days after the closing, which occurred on November 8, 2007. In addition, the Registration Rights Agreement requires LRLP to use its commercially reasonable efforts to cause the shelf registration statement to become effective no later than 180 days after the closing date of the Private Placement (the “Target Effective Date”). If the registration statement covering the Units is not declared effective by the SEC within 180 days after the closing date of the Private Placement (the “Target Effective Date”), then LRLP will be liable to each Purchaser for liquidated damages, and not as a penalty, of 0.25% of the product of $20.50 (the purchase price) times the number of Units purchased by the Purchaser (the “Liquidated Damages Amount”) per the 30-day period for the first 30 days following the Target Effective Date, increasing by an additional 0.25% of the Liquidated Damages Amount per each non-overlapping 30-day period for each subsequent 30-day period subsequent to the 30 days following the Target Effective Date, up to a maximum of 1.00% of the Liquidated Damages Amount per each non-overlapping 30-day period (i.e., 0.25% for 1-30 days; 0.5% for 31-60 days; 0.75% for 61-90 days; and 1.0% thereafter); provided, that the aggregate amount of liquidated damages payable by LRLP under the Registration Rights Agreement to each Purchaser shall not exceed 10.0% of the Liquidated Damages Amount with respect to such Purchaser. The Registration Rights Agreement also provides for the payment of liquidated damages in the event LRLP suspends the use of the shelf registration statement in excess of permitted periods. The Registration Rights Agreement also gives certain Purchasers piggyback registration rights with other shelf registration statements under certain circumstances.

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Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. Estimates and assumptions are evaluated on a regular basis. Legacy based its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making

judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of the financial statements. Changes in these estimates and assumptions could materially affect our financial position, results of operations or cash flows. Management considers an accounting estimate to be critical if:

•  it requires assumptions to be made that were uncertain at the time the estimate was made, and

•  changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

Please read Note 1 of the Notes to the Consolidated Financial Statements for a detailed discussion of all significant accounting policies that we employ and related estimates made by management.

           Nature of Critical Estimate Item:  Oil and Natural Gas Reserves — Our estimate of proved reserves is based on the quantities of oil and gas which geological and engineering data demonstrate, with reasonable certainty, to be recoverable in future years from known reservoirs under existing economic and operating conditions. LaRoche Petroleum Consultants, Ltd., annually prepares a reserve and economic evaluation of all our properties in accordance with SEC guidelines on a lease, unit or well-by-well basis, depending on the availability of well-level production data. The accuracy of our reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions, and the judgments of the individuals preparing the estimates. For example, we must estimate the amount and timing of future operating costs, severance taxes, development costs, and workover costs, all of which may in fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, the economics of producing the reserves may change and therefore the estimate of proved reserves also may change. Any significant variance in these assumptions could materially affect the estimated quantity and value of our reserves. Despite the inherent imprecision in these engineering estimates, our reserves are used throughout our financial statements. Reserves and their relation to estimated future net cash flows impact our depletion and impairment calculations. As a result, adjustments to depletion rates are made concurrently with changes to reserve estimates.

Assumptions/Approach Used:  Units-of-production method to deplete our oil and natural gas properties — The quantity of reserves could significantly impact our depletion expense. Any reduction in proved reserves without a corresponding reduction in capitalized costs will increase the depletion rate.

Effect if Different Assumptions Used:  Units-of-production method to deplete our oil and natural gas properties — A 10% increase or decrease in reserves would have decreased or increased, respectively, our depletion expense for the three-month period ended September 30, 2007 by approximately 10%.

Nature of Critical Estimate Item:  Asset Retirement Obligations — We have certain obligations to remove tangible equipment and restore land at the end of oil and gas production operations. Our removal and restoration obligations are primarily associated with plugging and abandoning wells. We adopted Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations effective January 1, 2003. SFAS No. 143 significantly changed the method of accruing for costs an entity is legally obligated to incur related to the retirement of fixed assets (“asset retirement obligations” or “ARO”). Primarily, SFAS No. 143 requires us to estimate asset retirement costs for all of our assets, adjust those costs for inflation to the forecast abandonment date, discount that amount using a credit-adjusted-risk-free rate back to the date we acquired the asset or obligation to retire the asset and record an ARO liability in that amount with a corresponding addition to our asset value. When new obligations are incurred, i.e. a new well is drilled or acquired, we add a layer to the ARO liability. We then accrete the liability layers quarterly using the applicable period-end effective credit-adjusted-risk-free rates for each layer. Should either the estimated life or the estimated abandonment costs of a property change materially upon our quarterly review, a new calculation is performed using the same methodology of taking the abandonment cost and inflating it forward to its abandonment date and then discounting it back to the present using our credit-adjusted-risk-free rate. The carrying value of the ARO is adjusted to the newly calculated value, with a corresponding offsetting adjustment to the asset retirement cost. Thus, abandonment costs will almost always approximate the estimate. When well obligations are relieved by sale of the property or plugging and abandoning the well, the related liability and asset costs are removed from our balance sheet.

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Assumptions/Approach Used:  Estimating the future asset removal costs is difficult and requires management to make estimates and judgments because most of the removal obligations are many years in the future and contracts and regulations often have vague descriptions of what constitutes removal. Asset removal technologies and costs are constantly changing, as are regulatory, political, environmental, safety and public relations considerations. Inherent in the estimate of the present value calculation of our AROs are numerous assumptions and judgments including the ultimate settlement amounts, inflation factors, credit-adjusted-risk-free-rates, timing of settlement, and changes in the legal, regulatory, environmental and political environments.

Effect if Different Assumptions Used:  Since there are so many variables in estimating AROs, we attempt to limit the impact of management’s judgment on certain of these variables by developing a standard cost estimate based on historical costs and industry quotes updated annually. Unless we expect a well’s plugging to be significantly different than a normal abandonment, we use this estimate. The resulting estimate, after application of a discount factor and some significant calculations, could differ from actual results, despite our efforts to make an accurate estimate. We engage independent engineering firms to evaluate our properties annually. We use the remaining estimated useful life from the year-end reserve report by our independent reserve engineers in estimating when abandonment could be expected for each property. We expect to see our calculations impacted significantly if interest rates continue to rise, as the credit-adjusted-risk-free rate is one of the variables used on a quarterly basis.

           Nature of Critical Estimate Item:  Derivative Instruments and Hedging Activities — We periodically use derivative financial instruments to achieve a more predictable cash flow from our oil and natural gas production by reducing our exposure to price fluctuations. Currently, these transactions are swaps whereby we exchange our floating price for our oil and natural gas for a fixed price with qualified and creditworthy counterparties (currently BNP Paribas, Bank of America, Key Bank and Wachovia). Our existing oil and natural gas swaps are with members of our lending group which enables us to avoid margin calls for out-of-the money mark-to-market positions.

We do not specifically designate derivative instruments as cash flow hedges, even though they reduce our exposure to changes in oil and natural gas prices. Therefore, the mark-to-market adjustments of these instruments is recorded in current earnings. While we are not internally preparing an estimate of the current market value of these derivative instruments, we use market value statements from each of our counterparties as the basis for these end-of-period mark-to-market adjustments. When we record a mark-to-market adjustment resulting in a loss in a current period, these unrealized losses represent a current period mark-to-market adjustment for commodity derivatives which will be settled in future periods. As shown in the tables above, we have hedged a significant portion of our future production through 2011. As oil and natural gas prices rise and fall, our future cash obligations related to these derivatives will rise and fall.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.

Commodity Price Risk

Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Realized pricing is primarily driven by the spot market prices applicable to our natural gas production and the prevailing price for crude oil. Pricing for oil and natural gas has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control, such as the strength of the global economy.

We periodically enter into, and anticipate entering into hedging arrangements in the future with respect to a portion of our projected oil and natural gas production through various transactions that hedge the future prices received. These transactions may include price swaps whereby we will receive a fixed price for our production and pay a variable market price to the contract counterparty. Additionally, we may enter into put options, whereby we pay a premium in exchange for the right to receive a fixed price at a future date. At the settlement date we receive the excess, if any, of the fixed floor over the floating rate. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage our exposure to oil and natural gas price fluctuations. We do not hold or issue derivative instruments for speculative trading purposes.

As of September 30, 2007, the fair market value of Legacy’s derivative positions was a net liability of $21.6 million. As of December 31, 2006, the fair market value of Legacy’s derivative positions was an asset of $3.1 million. The oil and natural gas swaps for 2007 through December 31, 2012 are tabulated in the tables presented above under “Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations — Cash Flow from Operations.”

At September 30, 2007, we have oil swaps in place covering future oil production of approximately 4.3 million barrels. Subsequent to September 30, 2007, oil futures prices have increased significantly. These increases in oil price futures will require us to make larger net settlement payments under commodity swap contracts. While these payments should not significantly affect our cash flow since payments made to counterparties to these contracts should be more than offset by increased commodity prices received on the sale of our production (some of which is unhedged), the increase in oil prices, should they continue, will negatively affect the fair value of our commodities contracts as recorded in our balance sheet at December 31, 2007 and during future periods and, consequently, our reported net earnings. Changes in the recorded fair value of commodity derivatives are marked to market through earnings and are likely to result in substantial charges to earnings for the decrease in the fair value of these contracts during the fourth quarter of 2007. If oil prices continue to increase, this negative effect on earnings will become more significant. We are currently unable to estimate the effects on earning s the fourth quarter of 2007, but the effects may be substantial.

Interest Rate Risks

  At September 30, 2007, Legacy had debt outstanding of $93.0 million, which incurred interest at floating rates in accordance with its revolving credit facility and the subordinated notes payable. The average annual interest rate incurred by Legacy for the nine-month period ended September 30, 2007 was 8.02%. A 1% increase in LIBOR on Legacy’s outstanding debt as of September 30, 2007 would result in an estimated $390,000 increase in annual interest expense. Legacy has entered into interest rate derivative transactions to mitigate its interest rate risk on $54 million of its outstanding debt balance by exchanging floating rates for fixed rates ranging from 4.8075% to 4.82%.

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Item 4.  Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our General Partner’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our General Partner’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2007. Based upon that evaluation and subject to the foregoing, our General Partner’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

Our General Partner’s Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A.  LEGAL PROCEEDINGS

 Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any legal or governmental proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are subject.

Item 1A.  RISK FACTORS

 In addition to the other information set forth in this report, you should carefully consider the factors discussed under, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results.  The risks described in our Annual Report on Form 10-K for the year ended December 31, 2006 are not the only risks we face.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

On April 16, 2007, we issued 611,247 units in consideration for our acquisition of producing oil and natural gas properties in the East Binger (Marchand) Unit in Caddo County, Oklahoma. The issuance of these units was exempt from registration under Section 4(2) of the Securities Act.

Issuer Purchases of Equity Securities
			(c ) Total	(d) Maximum
			Number of	Number (or
			Units	Approximate
			Purchased as	Dollar Value) of
			Part of	Units that
			Publicly	May Yet Be
	(a) Total	(b) Average	Announced	Purchased Under
	Number of	Price	Plans or	the Plans or
Period	Units Purchased	Paid per Unit	Programs	Programs
April 2007	17,256	$28.01	-	-
May 2007	5,782	$27.96	-	-
Total	23,038	$28.00	-	-

On April 11, 2007, employees of Legacy exercised 17,256 vested unit options granted under the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and immediately following such exercise transferred the units received upon such exercise to Legacy in exchange for a payment by Legacy of $28.01 per unit, the closing price of Legacy’s units on the NASDAQ Global Market on such date.

On May 17, 2007, employees of Legacy exercised 4,008 vested unit options granted under the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and immediately following such exercise transferred the units received upon such exercise to Legacy in exchange for a payment by Legacy of $28.00 per unit, the closing price of Legacy’s units on the NASDAQ Global Market on such date.

On May 18, 2007, employees of Legacy exercised 904 vested unit options granted under the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and immediately following such exercise transferred the units received upon such exercise to Legacy in exchange for a payment by Legacy of $27.92 per unit, the closing price of Legacy’s units on the NASDAQ Global Market on such date.

On May 22, 2007, employees of Legacy exercised 870 vested unit options granted under the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and immediately following such exercise transferred the units received upon such exercise to Legacy in exchange for a payment by Legacy of $27.84 per unit, the closing price of Legacy’s units on the NASDAQ Global Market on such date.

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Item 3.  Defaults Upon Senior Securities.

 None.

Item 4.  Submission of Matters to a Vote of Security Holders.

None.

Item 5.  Other Information.

 None.

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Item 6.  Exhibits.

The following documents are filed as a part of this quarterly report on Form 10-Q or incorporated by reference:

Exhibit Number	Description
3.1	Certificate of Limited Partnership of Legacy Reserves LP (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed May 12, 2006, Exhibit 3.1)
3.2	Amended and Restated Limited Partnership Agreement of Legacy Reserves LP (Incorporated by reference to Legacy Reserve LP’s Registration Statement on Form S-1 (File No. 33-134056) filed May 12, 2006, included as Appendix A to the Prospectus and including specimen unit certificate for the units)
3.3	Certificate of Formation of Legacy Reserves GP, LLC (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed May 12, 2006, Exhibit 3.3)
3.4	Amended and Restated Limited Liability Company Agreement of Legacy Reserves GP, LLC (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed May 12, 2006, Exhibit 3.4)
4.1	Registration Rights Agreement dated as of March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and Friedman, Billings, Ramsey & Co. (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed May 12, 2006, Exhibit 4.1)
4.2	Registration Rights Agreement dated June 29, 2006 between Henry Holding LP and Legacy Reserves LP and Legacy Reserves GP, LLC (the “Henry Registration Rights Agreement”) (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed September 5, 2006, Exhibit 4.2)
4.3	Registration Rights Agreement dated March 15, 2006 by and among Legacy Reserves LP, Legacy Reserves GP, LLC and the other parties thereto (the “Founders Registration Rights Agreement”) (Incorporated by reference to Legacy Reserves LP’s Registration Statement on Form S-1 (File No. 333-134056) filed September 5, 2006, Exhibit 4.3)
4.4	Registration Rights Agreement dated April 16, 2007 by and among Nielson & Associates, Inc., Legacy Reserves GP, LLC and Legacy Reserves LP (Incorporated by reference to Legacy Reserves LP Quarterly Report on Form 10-Q (File No. 001-33249) filed May 14, 2007, Exhibit 4.4)
10.1*	Purchase, Sale and Contribution Agreement dated July 11, 2007, by and among Raven Resources, LLC and Legacy Reserves Operating LP
10.2	Amended and Restated Legacy Reserves LP Long-Term Incentive Plan (Incorporated by reference to Legacy Reserves LP Current Report on Form 8-K (File No. 001-33249) filed August 23, 2007, Exhibit 10.1)
10.3*	Purchase, Sale and Contribution Agreement dated August 28, 2007, by and among Summit Petroleum Management Corporation and Legacy Reserves Operating LP
10.4*	Purchase, Sale and Contribution Agreement dated August 30, 2007, by and among The Operating Company and Legacy Reserves Operating LP
31.1*	Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)
31.2*	Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002)
32.1*	Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002)

 * Filed herewith

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EX-10.1

Exhibit 10.1

PURCHASE AND SALE AGREEMENT

BY AND BETWEEN

RAVEN RESOURCES, LLC, AS SELLER

AND

LEGACY RESERVES OPERATING LP, AS BUYER

TABLE OF CONTENTS

                                                                                                                                             ;                                                                                                                      PAGE

1.	SALE AND PURCHASE OF THE ASSETS.	1
1.1	Acquired Assets	1
1.2	Assumed Liabilities	2
2.	PURCHASE PRICE.	3
2.1	Purchase Price	3
2.2	Deposit.	3
2.3	Adjustments to the Base Purchase Price	3
2.4	Allocation	4
3.	CLOSING.	4
3.1	Closing	4
3.2	Delivery by Seller	5
3.3	Delivery by Buyer	5
3.4	Further Cooperation	5
4.	ACCOUNTING ADJUSTMENTS.	6
4.1	Closing Adjustments	6
4.2	Strapping and Gauging.	6
4.3	Taxes	6
4.4	Post-Closing Adjustments	7
4.5	Suspended Funds	7
4.6	Audit Adjustments	8
4.7	Cooperation	8
5.	DUE DILIGENCE: TITLE MATTERS.	8
5.1	General Access	8
5.2	Defensible Title	8
5.3	Defect Letters.	10
5.4	Effect of Title Defect	12
5.5	Preferential Rights and Consents.	13
6.	ENVIRONMENTAL ASSESSMENT.	15
6.1	Physical Condition of the Assets	15
6.2	Inspection and Testing.	15
6.3	Notice of Adverse Environmental Conditions	16
6.4	Rights and Remedies for Adverse Environmental Conditions.	17
6.5	Remediation by Seller	18
7.	REPRESENTATIONS AND WARRANTIES OF SELLER.	19
7.1	Seller’s Representations and Warranties	19
7.2	Scope of Representations of Seller.	21
8.	REPRESENTATIONS AND WARRANTIES OF BUYER.	22
8.1	Buyer’s Representations and Warranties	22
9.	CERTAIN AGREEMENTS OF SELLER	23
9.1	Maintenance of Assets	23
9.2	Records	24
9.3	Audit Rights.	25

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10.	CERTAIN AGREEMENTS OF BUYER	25
10.1	Plugging Obligation	25
10.2	Plugging Bond	25
10.3	Seller’s Logos	25
10.4	Like-Kind Exchanges	26
11.	CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER	26
11.1	No Litigation	26
11.2	Representations and Warranties	26
12.	CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER	26
12.1	No Litigation	26
12.2	Representations and Warranties	26
13.	TERMINATION.	26
13.1	Causes of Termination	26
13.2	Effect of Termination.	27
14.	INDEMNIFICATION.	28
14.1	Indemnification by Seller	28
14.2	Indemnification by Buyer	30
14.3	Physical Inspection	30
14.4	Notification	31
15.	MISCELLANEOUS.	31
15.1	Casualty Loss.	31
15.2	Confidentiality.	32
15.3	Notices	32
15.4	Press Releases and Public Announcements	33
15.5	Compliance with Express Negligence Test	33
15.6	Governing Law	33
15.7	Exhibits	33
15.8	Fees, Expenses, Taxes and Recording.	34
15.9	Assignment	34
15.10	Entire Agreement	34
15.11	Severability	34
15.12	Captions	35
15.13	Time of the Essence	35
15.14	Counterpart Execution	35

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EXHIBITS

1.1(A)	Oil and Gas Leases and Land
2.4	Allocation
3.2(A)	Form of Assignment and Bill of Sale
7.1(E)	AFE’s
7.1(G)	Pending Litigation
7.1(K)	Material Agreements
7.1(L)	Consents and Preferential Purchase Rights
7.1(M)	Gas Imbalances

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PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this “Agreement”) is entered into this 11^th day of July, 2007, but effective as of 7:00 a.m. (Central Time) on July 1, 2007 (the “Effective Time”), by and between Raven Resources, LLC, an Oklahoma limited liability company, (“Seller”) and Legacy Reserves Operating LP, a Delaware limited partnership (“Buyer”), a wholly-owned subsidiary of Legacy Reserves LP, a Delaware limited partnership. Buyer and Seller are collectively referred to herein as the “Parties” and sometimes individually referred to as a “Party.”

RECITALS:

A. Seller desires to sell to Buyer certain oil, gas and mineral properties and other assets on the terms and conditions set forth in this Agreement.

B. Buyer desires to purchase from Seller such oil, gas and mineral properties and other assets on the terms and conditions set forth in this Agreement.

WITNESSETH:

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

1.           SALE AND PURCHASE OF THE ASSETS.

1.1           Acquired Assets.  Subject to the terms and conditions of this Agreement, Seller agrees to sell, convey and deliver to Buyer and Buyer agrees to purchase, acquire and assume from Seller the following (collectively, the “Assets”):

(A) All of Seller’s right, title, interest and obligations in, to and under the oil and gas leases described in Exhibit 1.1(A) attached hereto (the “Leases”), covering the land described in Exhibit 1.1(A) (the “Land”), whether or not such interests or land are accurately or completely described on Exhibit 1.1(A), and all of Seller’s oil and gas leasehold or other interests in the Lands, together with all the property and rights incident thereto, including without limitation Seller’s rights and obligations in, to and under all operating agreements; pooling, communitization and unitization agreements; farmout agreements; joint venture agreements; product purchase and sale contracts; transportation, processing, treatment or gathering agreements; leases; permits (the “Permits”); rights-of-way (the “Rights-of-Way”); surface use agreements; surface leases; easements (the “Easements”); licenses; options; declarations; orders; contracts; and instruments in any way relating to the Leases;

Page 1

(B) All of Seller’s right, title and interest in and to the wells (“Wells”) situated on or used in conjunction with operations on the Leases and Land or on land pooled, communitized or unitized therewith (“Pooled Land”), together with all of Seller’s interests in and to all of the personal property, fixtures, improvements and other property, whether real, personal or mixed, now or as of the Effective Time on, appurtenant to or used or obtained by Seller in connection with the Leases, Land, Pooled Land or Wells or with the production, injection, treatment, sale or disposal of hydrocarbons and all other substances produced therefrom or attributable thereto (collectively, the “Equipment”), including, without limitation, producing and non-producing wells, injection wells, disposal wells, water supply wells, well equipment, casing, tubing, tanks, generators, boilers, buildings, pumps, motors, machinery, pipelines, gathering systems, power lines, telephone and telegraph lines, roads, field processing plants, field offices and other furnishings related thereto, equipment leases, trailers, inventory in storage, storage yards, and all other improvements or appurtenances thereunto belonging;

(C) Deleted;

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

(E) To the extent assignable, all governmental permits, licenses and authorizations, as well as any applications for the same, related to the Leases, Land, Pooled Land and Wells or the use thereof; and

(F) All of the files, records, and data of Seller relating to the items described in subsections (A), (B), (C), (D) and (E) above (the “Records”), including, without limitation, lease records, well records, and division order records; well files and prospect files; title records (including abstracts of title, title opinions and memoranda, and title curative documents related to the Leases and Wells); contracts and contract files; correspondence; computer data files; micro-fiche data files; geological, geophysical and seismic records, interpretations, data, maps and information, production records, electric logs, core data, pressure data, decline curves and graphical production curves; and accounting records, to the extent only that the Records can be transferred without violation of any third-party restriction and are not protected by Seller’s attorney-client privilege.  The Records do not include any appraisals or other evaluation materials related to Seller’s preparation of the Assets for sale hereunder, any reservoir and/or development studies prepared by or on behalf of Seller, nor any of Seller’s income tax returns or files related thereto.

1.2           Assumed Liabilities.  On the Closing Date, Buyer shall assume and agree to timely and fully pay, perform and otherwise discharge, without recourse to Seller or its affiliates, all of the liabilities and obligations of Seller and its affiliates, predecessors, successors, assigns or representatives, direct or indirect, known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, which relate, directly or indirectly, to the Assets, whether such liabilities and obligations accrue before, on or after the Effective Time (collectively, the “Assumed Liabilities”).  Notwithstanding the foregoing, Assumed Liabilities shall not include, and there is excepted, reserved and excluded from such liabilities assumed by Buyer, the liabilities and obligations for which Seller indemnifies Buyer pursuant to Section 14.1.

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2.           PURCHASE PRICE.

2.1           Purchase Price.  The purchase price for the Assets is TWENTY MILLION THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($20,300,000.00) (the “Base Purchase Price”), subject to the adjustments provided for herein.

2.2           Deposit.  Within three (3) days of the execution of this Agreement, Buyer shall deliver to Seller, in cash by wire-transfer in immediately available funds, a Deposit in an amount equal to ONE MILLION FIFTEEN THOUSAND AND NO/100 DOLLARS ($1,015,000.00)  (five percent [5%] of the Base Purchase Price) (the “Deposit”).  The Deposit shall be distributed to Seller and credited to the Base Purchase Price at Closing, or if this Agreement is terminated, shall be distributed or retained pursuant to Article 13, provided however that any interest on the Deposit shall be retained by Seller.  In the event the Deposit is not delivered to Seller as prescribed, this Agreement shall be terminated.

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

(A) The Base Purchase Price shall be adjusted upward by:

           (i)            any amount determined to be due Seller pursuant to Section 4.2;
 

(ii) Property Taxes and Severance Taxes related to the Assets paid by Seller for the period following the Effective Time as determined pursuant to Section 4.3;

(iii) an amount equal to the costs, expenses and other expenditures (whether capitalized or expensed) paid by Seller in accordance with this Agreement that are attributable to the Assets for the period from and after the Effective Time;

(iv) for all operated wells, a monthly rate of $400, prorated if necessary, per active Well, as provided in the applicable operating agreement, for operation and maintenance expenses (excluding workover costs, plugging and abandoning costs, and major costs) incurred by Seller while operating the Assets from and after the Effective Time;

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

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

(B) The Base Purchase Price shall be adjusted downward by:

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

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

(iii) all amounts related to Title Defects as determined pursuant to Section 5.4, consents and preferential rights as determined pursuant to Section 5.6, Adverse Environmental Conditions as determined pursuant to Section 6.4, Exclusion Adjustments as determined pursuant to Sections 5.6 or 6.4, and Casualty Losses as determined pursuant to Section 15.1;

(iv) Property Taxes and Severance Taxes related to the Assets to be paid by Seller for the period prior to the Effective Time as determined pursuant to Section 4.3; and

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

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

2.4           Allocation.  The Base Purchase Price shall be allocated to the Assets as set forth in Exhibit 2.4.  The Parties agree that the values allocated to various portions of the Assets, which are set forth on Exhibit 2.4 (singularly with respect to each item, the “Allocated Value” and collectively, the “Allocated Values”), shall be binding on Seller and Buyer and shall be used only for the purposes of adjusting the Base Purchase Price pursuant to Sections 4.3 (relating to Taxes), 5.4 (relating to Title Defects), 15.1 (relating to Casualty Losses), and 6 (relating to Adverse Environmental Conditions), and are not intended as a measure of value for any other purpose.

3.           CLOSING.

3.1           Closing.  The sale and purchase of the Assets (“Closing”) shall be held on or before July 31, 2007 (“Closing Date”).  Buyer shall have the option to extend the Closing Date until August 31, 2007 in order to complete due diligence, title or audit work.  In the case of such extension, Buyer shall pay interest at 7% per annum on the balance of the purchase price less deposit from August 11^th until the closing date or until August 31^st, whichever is sooner.  The closing will take place at the offices of Legacy Reserves LP, in Midland, Texas.

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

(A) A separate Assignment and Bill of Sale executed by each Seller, substantially in the form attached hereto as Exhibit 3.2(A), effecting the sale, transfer, conveyance and assignment of the Assets, with (i) a special warranty of the real property title by, through and under such Seller but not otherwise, and (ii) with all personal property and fixtures conveyed “AS IS, WHERE IS,” with no warranties whatsoever, express, implied or statutory.

(B) Any governmental forms required to effect transfer in accordance with applicable regulations;

(C) Letters in lieu of transfer orders instructing purchasers of production to pay to Buyer the proceeds of sales of Oil and Gas from the Assets;

(D) Executed change of operator forms as required by applicable governmental regulation;

(E) Releases of the mortgages in favor of any bank that may be currently encumbering the Assets;

(F) The Closing Adjustment Statement;

(G) A Non-Foreign Affidavit of each Seller;

(H) Possession of the Records and all other Assets.

(I) Letters of resignation as operator of these Assets, as appropriate, along with ballot forms to the partners as directed by the operating agreements.

3.3           Delivery by Buyer.  At Closing, Buyer shall deliver to Seller or Seller’s designee the Purchase Price set forth in the Closing Adjustment Statement by wire transfer in immediately available funds, less the Deposit and interest earned on the Deposit.  Buyer shall also deliver evidence that it has provided replacement instruments for each guaranty, bond, letter of credit or similar contingent obligation given by Seller as required by law or the provisions of any Lease or other agreement along with the appropriate instruments necessary to receive immediate approval as Operator of these Assets, as appropriate. Buyer shall execute and deliver the Assignment and Bill of Sale, Closing Adjustment Statement and other closing documents as necessary or appropriate.

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

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4.           ACCOUNTING ADJUSTMENTS.

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

4.2           Strapping and Gauging.  Seller will cause the Oil and Gas in the storage facilities located on, or utilized in connection with, the Leases to be measured, gauged or strapped as of the Effective Time.  Seller will cause the production meter charts (or if such do not exist, the sales meter charts) on the pipelines transporting Oil and Gas from the Leases to be read as of such time.  The Oil and Gas in such storage facilities above six inches or through the meters on the pipelines as of the Effective Time shall belong to Seller and shall be valued based on the price actually paid for Oil and Gas produced from the Assets for the month prior to the Effective Time, and the Oil and Gas placed in such storage facilities after the Effective Time and production upstream of the aforesaid meters shall belong to Buyer and become part of the Assets.  Buyer or Buyer’s representative shall have the option to witness the gauging by Seller.  In the event Buyer or Buyer’s representative exercising the option to witness the gauging by Seller, Buyer agrees that the waiver and release provisions set forth in Section 5.1(A) of this Agreement shall apply thereto.

This provision should not apply to any Assets that are not operated by Seller.  There shall be no settlement for Stock in Tanks on non-operated Assets.

4.3           Taxes

.

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

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

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

4.4           Post-Closing Adjustments

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

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

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

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

4.5           Suspended Funds.  At the Closing, Seller shall provide to Buyer a listing showing all proceeds from production attributable to the Leases which are currently held in suspense and shall transfer to Buyer all of those suspended proceeds.  Buyer shall be responsible for proper distribution of all the suspended proceeds, to the extent turned over to it by Seller, to the parties lawfully entitled to them and any claims related thereto, and Buyer hereby agrees to indemnify, defend and hold harmless Seller from and against any and all claims, liabilities, losses, costs and expenses arising out of or relating to those suspended proceeds and any claims related thereto after the Effective Date.  Seller shall remain responsible and liable for any claims, liabilities, losses, costs and expenses arising out of or relating to those suspended proceeds and any claims related thereto through the Closing Date.

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

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

5.           DUE DILIGENCE: TITLE MATTERS.

5.1           General Access

(A) During reasonable business hours, Seller agrees to grant Buyer physical access to the Leases and Wells to allow Buyer to conduct, at Buyer’s sole risk and expense, on-site inspections and environmental assessments of the Leases and Wells. Buyer agrees not to enter onto the Leases or contact field employees without Seller’s prior knowledge. In connection with any such on-site inspections, Buyer agrees not to interfere with the normal operation of the Leases and Wells and agrees to comply with all requirements of the operators of the Wells.  If Buyer or its agents prepares an environmental assessment of any Lease or Well, Buyer agrees to keep such assessment confidential and to furnish copies thereof to Seller.  In connection with granting such access, Buyer represents that it is adequately insured and waives, releases and agrees to indemnify the Seller against all claims for injury to, or death of, persons or for damage to operations or property arising in any way from the access afforded to Buyer hereunder or the activities of Buyer.  This waiver, release and indemnity by Buyer shall survive termination of this Agreement.

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

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

(A) As to the Assets, that record title or operating rights of Seller which:

(i) entitles Seller to receive not less than the interests shown in Exhibit 2.4 as the “Net Revenue Interest” of all Oil and Gas produced, saved and marketed from or allocated to the formations in the associated Wells which are producing as of the date of this Agreement or which have otherwise been given Allocated Value, all without reduction, suspension or termination except as stated in such Exhibit or otherwise permitted as Permitted Encumbrances; and

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(ii) obligates Seller to bear a percentage of the costs and expenses relating to the maintenance and development of, and operations relating to, the producing formations in each associated Well not greater than the “Working Interest” shown in Exhibit 2.4 (without a proportionate increase in the Net Revenue Interest), all without increase except as stated in such Exhibit or otherwise permitted as Permitted Encumbrances; and

(B) That title of Seller to the Assets is free and clear of liens, encumbrances and defects that materially and adversely affect the ownership, operation or use of the Assets, except for Permitted Encumbrances.

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

(1)   The provisions of the Leases and any lessor’s royalties, overriding royalties, net profits interests, carried interests, production payments, reversionary interests and similar burdens reflected in the public records or in the Records, if the net cumulative effect of the burdens does not operate to reduce the Net Revenue Interest of Seller below the interests described in Exhibit 2.4;

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

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

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

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

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

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

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(8)   All operating agreements, unit agreements, unit operating agreements, pooling agreements and pooling designations affecting the Assets that are either (i) of record in Seller’s chain of title or (ii) reflected or referenced in the Records or (iii) included as Material Agreements on Exhibit 7.1(K);

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

(10) All rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Assets in any manner, and all applicable laws, rules and orders of governmental authority;

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

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

5.3           Defect Letters.

(A) Buyer may from time to time and no later than three (3) business days prior to Closing notify Seller in writing (a “Notice”) of any matter which would cause title to all or part of the Assets not to be Defensible Title (“Title Defect”), provided that no Title Defect shall be deemed to exist unless the Title Defect Value thereof exceeds Ten Thousand Dollars ($10,000.00). Further, there shall be no adjustment to the Base Purchase Price unless the aggregate Title Defect Values of all Title Defects satisfying the condition in clause (i) exceed one percent (1%) of the Base Purchase Price (the “Title Defect Threshold”) (such amount being a threshold, not a deductible).  In order to provide Seller a reasonable opportunity to cure any Title Defects prior to Closing, Buyer shall use reasonable efforts to provide the Notice as soon as reasonably possible after becoming aware of or making its determination of the Title Defect.

(B) In the Notice, Buyer must describe with reasonable detail each alleged Title Defect it has discovered and the steps required to cure each Title Defect, include Buyer’s reasonable estimate of the Title Defect Value attributable to each, and include all data and information in Buyer’s possession or control bearing thereon.  Subject to the special warranty in the Assignment and Bill of Sale delivered at Closing, Buyer shall be deemed to have conclusively waived all Title Defects not disclosed to Seller in a Notice before three (3) business days prior to Closing.  Subject to the special warranty in the Assignment and Bill of Sale delivered at Closing, Buyer waives any remedy against Seller for Title Defects that do not exceed the Title Defect Threshold or for which timely notice is not given as provided hereunder or for which adjustment is made as hereafter provided.

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(C) Upon timely delivery of a Notice by Buyer:

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

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

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

(iv)   if at any time any Title Consultant so chosen fails or refuses to perform hereunder, a new Title Consultant shall be chosen by the Parties.  The cost of any such Title Consultant shall be borne fifty percent (50%) by Seller and fifty percent (50%) by Buyer.  Each Party shall present a written statement of its position on the Title Defect and/or Title Defect Value in question to the Title Consultant within five (5) days after the Title Consultant is selected, and the Title Consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) business days of receipt of such position statements.  The determination by the Title Consultant shall be conclusive and binding on the Parties, and shall be enforceable against any Party in any court of competent jurisdiction.  If necessary, the Closing Date shall be deferred only as to those Assets affected by any unresolved disputes regarding the existence of a Title Defect and/or the Title Defect Value until the Title Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Seller and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than thirty (30) days beyond the scheduled Closing Date in Section 3.1.  Once the Title Consultant’s determination has been expressed to both Parties, if applicable, Seller shall have five (5) days in which to advise Buyer in writing which of the options available to Seller under Section 5.4 that Seller elects regarding each of the Assets as to which the Title Consultant has made a determination.  In evaluating whether a Title Defect exists, due consideration shall be given to the length of time that the particular Asset has been producing Oil and Gas and whether such fact, circumstance or condition is of the type expected to be encountered in the area involved and is usual and customarily acceptable to reasonable and prudent operators, working interest owners and/or purchasers engaged in the business of the exploration, development, and operation of oil and gas properties.

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5.4           Effect of Title Defect

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

(i)    adjust the Base Purchase Price in the amount of the Title Defect Value of the Asset to which such Title Defect relates and proceed to Closing on all Assets; provided that Seller shall not be obligated to transfer any Assets for which the Title Defect Value equals or exceeds such Asset’s Allocated Value; or

(ii)   proceed with (a) Closing on those Assets not affected by the valid Title Defects and such Assets to which a Title Defect relates but for which Seller has elected to proceed to Closing with an adjustment of the Base Purchase Price in the amount of the Title Defect Value of such Assets and (b) defer Closing on those other Assets to which a Title Defect relates and for which Seller has elected to attempt to cure such Title Defect and to not proceed to Closing, for which Buyer shall place into escrow an amount equal to the Allocated Values of the Assets affected by the valid Title Defects, which withheld amount shall be paid to Seller when the Asset affected by any valid Title Defect is cured or the Title Defect is waived by Buyer and the affected Asset is conveyed from Seller to Buyer.  If neither of the above occurs and if Seller later determines it will not cure a Title Defect on or before six (6) months from the Closing Date, the amount in the escrow account attributable to such Title Defect will be returned to Buyer and Seller shall retain such Asset affected by such Title Defect.

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

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

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(ii)   if the valid 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), the amount of the Title Defect Value is to be determined by taking into account the Allocated Value of such Asset, the portion of the Asset affected by the Title Defect, the legal effect of the Title Defect, the potential economic effect of the Title Defect over the life of the affected Asset, and the Title Defect Values placed upon the Title Defect by Buyer and Seller.

(iii)  Notwithstanding the above, in no event shall the total of the Title Defect Values related to a particular Asset exceed the Allocated Value of such Asset.

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

5.5           Preferential Rights and Consents.  Seller shall use its best efforts to obtain all required consents and to give notices required in connection with preferential purchase rights, so that the third party election date to exercise the preferential right will occur at least seven (7) business days prior to Closing.  If Buyer discovers other affected Assets during the course of Buyer’s due diligence activities, Buyer shall notify Seller immediately and Seller shall use its best efforts to obtain such consents and to give the notices required in connection with the preferential rights prior to Closing.

(A) Consents.

Except for consents and approvals which are customarily obtained post-Closing and those consents which would not invalidate the conveyance of the Assets, if a necessary consent to assign any Lease has not been obtained as of the Closing that would invalidate the conveyance of the Asset, then (i) the portion of the Assets for which such consent has not been obtained shall not be conveyed at the Closing, (ii) the Allocated Value for that Asset shall not be paid to Seller, and (iii) Seller shall use best efforts to obtain such consent as promptly as possible following Closing.  If such consent has been obtained as of the date on which the Post-Closing Adjustment Statement becomes final, Seller shall convey the affected Asset to Buyer effective as of the Effective Time and Buyer shall pay Seller the Allocated Value of the affected Asset, less any proceeds from the affected Asset received by Seller attributable to the period of time after the Effective Time (calculated in accordance with Section 2.3).  If such consent has not been obtained or has not been waived by Buyer as of the date on which the Post-Closing Adjustment Statement becomes final, Seller shall elect either to (i) challenge in court the enforceability of such consent right, in which event Seller shall retain the affected Asset until such legal challenge is finally resolved by settlement or non-appealable court order, after which either Seller shall convey the affected Asset to Buyer under the terms of this Agreement and Buyer shall pay the Allocated Value of the Purchase Price for such Asset, less any proceeds received by Seller attributable to such Asset for the period from and after the Effective Time (calculated in accordance with Section 2.3) or (ii) retain the affected Asset and the Purchase Price shall be reduced by an amount equal to the Allocated Value of the retained Asset (with such adjustment being an “Exclusion Adjustment”).  Buyer shall reasonably cooperate with Seller in obtaining any required consent including providing assurances of reasonable financial conditions, but Buyer shall not be required to expend funds or make any other type of financial commitments a condition of obtaining such consent.

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(B) Preferential Purchase Rights.

 (i)    If any preferential right to purchase any portion of the Assets is exercised prior to the Closing Date, or if the time frame for the exercise of such preferential purchase rights has not expired and Seller has not received notice of an intent not to exercise or waiver of the preferential purchase right, that portion of the Assets affected by such preferential purchase right shall be excluded from the Assets and the Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such affected Assets without the requirement for Buyer to give notice (with such adjustment being an “Exclusion Adjustment”). Notwithstanding any other provision in this Agreement, if a preferential purchase right subject to this Agreement is exercised, Buyer has the right, at its sole discretion, to terminate this Agreement, provided that the allocated value of all preferential rights exercised is equal to or exceeds ten percent (10%) of the Base Purchase Price.

(ii)   If a third party exercises its preferential right to purchase, but fails to consummate the purchase prior to the Closing, Seller shall retain the affected Assets and the Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such affected Assets (with such adjustment being an “Exclusion Adjustment”).

(iii)  If a third party exercises its preferential right to purchase, but does not consummate the purchase within the time frame specified in the preferential purchase right, Seller agrees to convey the affected Asset to Buyer effective as of the Effective Time, and Buyer agrees to pay Seller the Allocated Value of the Affected Asset.

(iv)   If a preferential purchase right is not discovered prior to Closing, and the affected Asset is conveyed to Buyer at Closing, and the preferential purchase right is exercised and subsequently consummated after Closing, Buyer agrees to convey such affected Assets to the party exercising such right on the same terms and conditions under which Seller conveyed such Assets to Buyer and retain all amounts paid by the party exercising such preferential right to purchase.  In the event of such exercise, Buyer shall prepare, execute and deliver a form of conveyance of such Asset to such exercising party, such conveyance to be in form and substance as provided in this Agreement, and Seller agrees to hold harmless and indemnify Buyer from any and all liabilities and obligations associated with such conveyed Asset, and to reimburse Buyer for reasonable expenses incurred by Buyer relating to the conveyed Asset.

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(C) Exclusive Remedy.  The remedies set forth in this Section 5.5 are the exclusive remedies under this Agreement for exercised preferential purchase rights and required consents to assign the Assets.

6.           ENVIRONMENTAL ASSESSMENT.

6.1           Physical Condition of the Assets

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(A) Buyer acknowledges that the Assets have been used for oil and gas drilling and production operations and possibly for the storage and disposal of waste materials or hazardous substances related to standard oil field operations.  Physical changes in or under the Assets or adjacent lands may have occurred as a result of such uses.  The Assets also may contain previously plugged and abandoned wells, buried pipelines, storage tanks and other equipment, whether or not of a similar nature, the locations of which may not now be known by Seller or be readily apparent by a physical inspection of the Assets.  Buyer understands that Seller does not have the requisite information with which to determine the exact nature or condition of the Assets nor the effect any such use has had on the physical condition of the Assets.  Pursuant to the Safe Water Drinking and Toxic Enforcement Act of 1986, Buyer is hereby notified and assumes the risk that detectable amounts of chemicals known to cause cancer, birth defects and other reproductive harm may be found in, on or around the Assets.  Upon consummation of the Closing Buyer shall be deemed to have assumed the risk of expense, claim, damage or liability arising from any such matter referred to in this section, including without limitation the risk that the Assets may contain waste or contaminants and that adverse physical conditions, including the presence of waste or contaminants, may not have been revealed by Buyer’s investigation.  Consummation of the Closing shall transfer all responsibility and liability related to disposal, spills, waste or contamination from, on or below the Assets from Seller to Buyer.

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

6.2           Inspection and Testing.

(A) Prior to Closing, Buyer shall have the right, at its sole cost and risk, to review Seller’s Phase I environmental assessments of the Assets, if any exist, and to conduct any further environmental assessment of the Assets it deems appropriate, to the extent that Seller has the authority to grant such right to Buyer; provided that Seller shall have the right to review and approve any plan to conduct such an environmental assessment, with such approval not to be unreasonably withheld, delayed or conditioned by Seller.  Buyer shall immediately provide to Seller any data obtained from such assessments, including any reports and conclusions.  Seller and Buyer shall keep all information relating to such assessments strictly confidential whether or not Closing occurs, except as may be required pursuant to any Environmental Laws.

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

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

6.3           Notice of Adverse Environmental Conditions.  No later than three (3) business days prior to Closing, Buyer shall notify Seller in writing of any Adverse Environmental Condition with respect to the Assets.  Such notice shall describe in reasonable detail the Adverse Environmental Condition and include the estimated Environmental Defect Value attributable thereto (the “Environmental Defect Notice”) based on a verifiable estimate of the cost to Remediate the Adverse Environmental Condition.  No Adverse Environmental Condition shall be deemed to exist unless the Environmental Defect Value exceeds Ten Thousand Dollars ($10,000.00) in each individual case.  Further, there shall be no adjustment to the Base Purchase Price unless the aggregate Environmental Defect Values of all Adverse Environmental Conditions satisfying the condition in clause (i) exceeds one percent (1%) of the Base Purchase Price (the “Environmental Defect Threshold”) (such amount being a threshold, not a deductible).  The “Environmental Defect Value” attributable to any Adverse Environmental Condition shall be the estimated amount (net to Seller’s interest) of all reasonable costs and claims necessary to Remediate the Adverse Environmental Conditions, as reasonably determined and estimated by Buyer.  The term “Adverse Environmental Condition” means (i) the failure of the Assets to be in material compliance with all applicable Environmental Laws; (ii) the Assets being subject to any agreements, consent orders, decrees or judgments currently in existence based on any Environmental Laws that negatively and materially impact the future use of any portion of the Assets or that require any material change in the present conditions of any of the Assets; or (iii) the Assets being subject to any material uncured notices of violations of or non-compliance with any applicable Environmental Laws or any claim of material violation of any Environmental Laws to the extent not disclosed to Buyer prior to execution of this Agreement.  Buyer shall be deemed to have conclusively waived (i) all Adverse Environmental Conditions not contained in an Environmental Defect Notice delivered to Seller at least three (3) business days prior to Closing and (ii) any remedy against Seller for Adverse Environmental Conditions that do not exceed the Environmental Defect Threshold.

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6.4           Rights and Remedies for Adverse Environmental Conditions.

(A) With respect to any Adverse Environmental Conditions affecting one or more of the Assets which exceed the Environmental Defect Threshold, Seller may on an Asset-by-Asset basis (i) Remediate the Adverse Environmental Conditions prior to Closing, but Seller shall have no obligation to do so, and proceed to Closing with no adjustment of the Base Purchase Price; (ii) proceed to Closing and adjust the Base Purchase Price in an amount equal to the applicable Environmental Defect Value; or (iii) retain the affected Asset and reduce the Base Purchase Price by the Allocated Value of the affected Asset (“Exclusion Adjustment”).

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

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

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

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

(F) If Seller and Buyer are unable to agree on the amount of the Environmental Defect Value within ten (10) business days after Seller’s receipt of the Environmental Defect Notice or that an Adverse Environmental Condition exists, has been Remediated or is required to be Remediated, then the dispute will be submitted to a mutually acceptable company with recognized expertise in the oil and gas environmental remediation and regulation field (the “Environmental Consultant”) whose determination shall be final and binding upon the Parties.  Seller and Buyer shall each bear their respective costs and expenses incurred in connection with any such dispute, and one-half (1/2) of the fees, costs and expenses charged by the Environmental Consultant.  Each Party shall present a written statement of its position on the Adverse Environmental Condition and/or the Environmental Defect Value in question to the Environmental Consultant within five (5) business days after the Environmental Consultant is selected, and the Environmental Consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) business days of receipt of such position statements.  If necessary, the Closing Date shall be deferred only as to those Assets affected by any unresolved disputes regarding the existence of an Adverse Environmental Condition and/or the Environmental Defect Value until the Environmental Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Seller and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than thirty (30) days beyond the scheduled Closing Date in Section 3.1.  All Assets as to which no such dispute(s) exist shall be conveyed to Buyer subject to the terms of this Agreement at Closing.  Once the Environmental Consultant’s determination has been expressed to both Parties, if applicable, Seller shall have five (5) business days in which to advise Buyer in writing which of the options available to Seller under Section 6.4(A) Seller elects regarding each of the Assets as to which the Environmental Consultant has made a determination.

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

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

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

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

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

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

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

(ii) the Adverse Environmental Condition has been Remediated to the level required by the Environmental Laws or as agreed by the Parties.

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

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

7.           REPRESENTATIONS AND WARRANTIES OF SELLER.

7.1           Seller’s Representations and Warranties.  Except as set forth in the exhibits to this Agreement or as otherwise disclosed to Buyer by Seller in connection with preparation of Buyer’s offer to purchase the Assets, Seller represents and warrants the following as of the date of execution of this Agreement and the Closing:

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(A) Status.  Raven Resources, LLC is a limited liability company duly organized, legally existing and in good standing under the laws of the State of Oklahoma.

(B) Authority.  Seller owns the Assets and has the requisite power and authority to enter into this Agreement, to carry out the transactions contemplated hereby, to transfer the Assets in the manner contemplated by this Agreement, and to undertake all of the obligations of Seller set forth in this Agreement.

(C) Validity of Obligations.  This Agreement and any documents or instruments delivered by Seller at the Closing shall constitute legal, valid and binding obligations of Seller enforceable in accordance with their terms subject, however, to the effects of bankruptcy, insolvency, reorganization, moratorium and other laws for the protection of creditors, as well as to general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law.

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

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

(F) Contractual Restrictions.  Except to the extent otherwise permitted by this Agreement, Seller has not entered into any contracts for or received prepayments, take-or-pay arrangements, buydowns, buyouts for Oil and Gas, or storage of the same relating to the Assets which Buyer shall be obligated to honor and make deliveries of Oil and Gas or pay refunds of amounts previously paid under such contracts or arrangements.

(G) Litigation.  Except as set forth in Exhibit 7.1(G), there is no suit or action pending, arising out of, or to Seller’s knowledge threatened that would have a material adverse affect upon the ownership, operation or value of the Assets.

(H) Permits and Consents.  To Seller’s knowledge, with respect to Assets for which Seller is the operator, Seller has (i) acquired all material permits, licenses, approvals and consents from appropriate governmental bodies, authorities and agencies to conduct operations on the Assets in compliance with applicable laws, rules, regulations, ordinances and orders; and (ii) is in material compliance with all such permits, licenses, approvals and consents.

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

(J) Taxes.  (i) Seller has filed (with respect to the Assets) all material returns for Property Taxes and Severance Taxes that are due, (ii) all payments (with respect to the Assets) shown to be due on such returns have been paid, and (iii) there is no material dispute or claim concerning any Property Tax or Severance Tax liability of the Seller (with respect to the Assets) claimed or raised by any tax authority in writing.

(K) Material Agreements.  To the best of Seller’s knowledge, all agreements material to the ownership, operation or value of the Assets are listed in Exhibit 7.1(K) (“Material Agreements”).

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

(M) Gas Imbalances.  To the best of Seller’s knowledge, Exhibit 7.1(M) lists all gas imbalances with respect to the Assets as of the Effective Time.

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

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

(P) Calls on Production.  There are no calls on production pertaining to the Assets that provide for payment at less than applicable current market prices.

7.2           Scope of Representations of Seller.

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

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

8.           REPRESENTATIONS AND WARRANTIES OF BUYER.

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

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

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

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

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(D) Qualification and Bonding.  Buyer is in compliance with the bonding and liability insurance requirements of all applicable state or federal laws or regulations that could affect Buyer’s ability or authority to own and operate the Assets and is qualified to own any federal, Indian or state oil and gas leases that constitute part of the Assets.

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

(F) Evaluation.  By reason of Buyer’s knowledge and experience in the evaluation, acquisition and operation of oil and gas properties, Buyer has evaluated the merits and risks of purchasing the Assets from Seller and has formed an opinion based solely upon Buyer’s knowledge and experience and not upon any representations or warranties by Seller.

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

(H) Broker’s Fees.  Buyer has incurred no obligation or liability, contingent or otherwise, for brokers’ or finders’ fees in respect of the matters provided for in this Agreement, and, if any such obligation or liability exists, it shall remain an obligation of Buyer, and Seller shall have no responsibility therefor.

(I) No Knowledge of Seller’s Breach.  As of the date of execution of this Agreement, Buyer has no knowledge of any breach by Seller of any representation or warranty of Seller, or of any other fact, event, condition or circumstance that would excuse Buyer from the timely performance of its obligations hereunder.

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

9.1           Maintenance of Assets.  From the Effective Time until Closing, Seller agrees that, for those Assets which it operates, it shall:

(A) Administer and operate the Assets in accordance with the applicable operating agreements.

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(B) Not introduce any new methods of management, operation or accounting with respect to any or all of the Assets.

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

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

(E) Not voluntarily relinquish its position as operator to anyone other than Buyer with respect to any of the Assets or voluntarily abandon any of the Wells other than as required pursuant to the terms of a Lease or by regulation.

(F) Not, without the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned), (i) enter into any agreement or arrangement (other than one constituting a Permitted Encumbrance) transferring, selling or encumbering any of the Assets (other than in the ordinary course of business, including ordinary course sales of production, inventory or salvage; (ii) grant any preferential or other right to purchase or agree to require the consent of any party not otherwise required to consent to the transfer and assignment of the Assets to Buyer; (iii) enter into any new sales contracts or supply contracts which cannot be cancelled upon thirty (30) days prior notice; or (iv) incur or agree to incur any contractual obligation  (absolute or contingent) with respect to the Assets except as otherwise provided herein (including ordinary course sales of production, inventory or salvage or pursuant to any disclosed AFEs covering the Assets).

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

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

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9.3           Audit Rights.  Seller agrees to make available to Buyer prior to and for a period of twelve months following Closing any and all existing information and documents in the possession of Seller that Buyer may reasonably require to comply with Buyer’s tax and financial reporting requirements and audits.  Without limiting the generality of the foregoing, Seller will use its commercially reasonable efforts after execution of this Agreement and for twelve months following Closing to cooperate with the independent auditors chosen by Buyer (“Buyer’s Auditor”) in connection with their audit of any annual revenue and expenses statements of the Assets that Buyer or any of its Affiliates requires to comply with their tax and financial reporting requirements, and their review of any interim quarterly revenue and expense statements of the Assets that Buyer requires to comply with such reporting requirements.  Buyer’s cooperation will include (i) such reasonable access to Seller’s employees who were responsible for preparing the revenue and expense statements and work papers and other supporting documents used in the preparation of such financial statements as may be required by Buyer’s Auditor to perform an audit in accordance with generally accepted auditing standards, and (ii) delivery of one or more customary representation letters (in substantially the form previously approved by Seller and Buyer) from Seller to Buyer’s Auditor that are requested by Buyer to allow such auditors to complete an audit (or review of any interim quarterly financials), and to issue an opinion that in Buyer’s experience is acceptable with respect to an audit or review of those revenue and expense statements required pursuant to this Section.  Buyer will reimburse Seller, within three (3) business days after demand therefore, for any reasonable out-of-pocket and overhead costs with respect to any costs incurred by Seller in complying with the provisions of this Section.  In the event that Buyer’s Auditors determine that any of the Assets are not auditable due to insufficient financial records, or for any reason determined by Auditors, then the unauditable Assets will be excluded from this sale and the purchase price will be reduced by the value of said Assets pursuant to the allocated value as seen in Exhibit 2.4.

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

10.1           Plugging Obligation. Upon consummation of the Closing, Buyer shall perform and assume all liability for the necessary and proper plugging and abandonment of all Wells and all surface restoration and reclamation required by law or the Leases.

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

10.3           Seller’s Logos.  Commencing no later than thirty (30) days after Closing, Buyer shall promptly cover or cause to be covered by decals or new signage any names and marks used by Seller, and all variations and derivatives thereof and logos relating thereto, from the Assets and shall not thereafter make any use whatsoever of such names, marks and logos.

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10.4           Like-Kind Exchanges.  Each party consents to the other party’s assignment of its rights and obligations under this Agreement to its Qualified Intermediary (as that term is defined in Section 1.1031(k)-1(g)(4)(v) of the Treasury Regulations), or to its Qualified Exchange Accommodation Titleholder (as that term is defined in Rev. Proc. 2000-37), in connection with effectuation of a like-kind exchange.  However, Seller and Buyer acknowledge and agree that any assignment of this Agreement to a Qualified Intermediary or to a Qualified Exchange Accommodation Titleholder does not release either party from any of their respective liabilities and obligations to each other under the Agreement.  Each party agrees to cooperate with the other to attempt to structure the transaction as a like-kind exchange.

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

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

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

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

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

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

13.           TERMINATION.

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

(A) At any time by mutual consent of the Parties.

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

(C) By Buyer if, on the Closing Date, any of the conditions set forth in Article 11 hereof shall not have been satisfied or waived; provided, however, that Seller shall have the right to satisfy such condition for a period of twenty (20) days following delivery of notice from Buyer regarding such failure or, if such condition cannot reasonably be satisfied within such 20-day period, Seller shall have the right to commence the actions necessary to satisfy such condition within such 20-day period and thereafter to diligently continue such actions beyond such period until such satisfaction has been effected.

(D) By Seller if, on the Closing Date, any of the conditions set forth in Article 12 hereof shall not have been satisfied or waived; provided, however, that with respect to any condition other than a material failure of Buyer to perform its obligations under Section 3.2, as to which the granting of any cure period shall be entirely within Seller’s sole and absolute discretion, Buyer shall have the right to satisfy such condition for a period of twenty (20) days following delivery of notice from Seller regarding such failure or, if such condition cannot reasonably be satisfied within such 20-day period, Buyer shall have the right to commence the actions necessary to satisfy such condition within such 20-day period and thereafter to diligently continue such actions beyond such period until such satisfaction has been effected.

13.2           Effect of Termination.

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

(B) Seller’s Breach.  If Closing does not occur because Seller wrongfully fails to tender performance at Closing or otherwise breaches this Agreement prior to Closing, and Buyer is ready to close and is not in material breach of this Agreement, Buyer may terminate this Agreement, in which event Seller will return the Deposit, together with interest thereon, to Buyer immediately after the determination that the Closing will not occur.  If Buyer elects not to terminate this Agreement upon any such breach by Seller, Buyer shall retain all legal remedies for Seller’s breach of this Agreement, including, without limitation, specific performance of this Agreement; provided, however, that in any suit for damages by Buyer against Seller for any such breach (i) Buyer’s total damages arising out of or related to Seller’s breach of any provision of this Agreement shall be limited to the amount of the Deposit, and (ii) Seller shall not have any liability to Buyer for consequential, special, punitive or exemplary damages arising out of or related to Seller’s breach of any provision of this Agreement.  The foregoing limitations on damages shall not preclude Buyer from seeking specific performance of this Agreement.  Seller’s failure to close shall not be considered wrongful if (i) conditions to Seller’s conditions to close under Article 12 are not satisfied through no fault of Seller and are not waived; or (ii) Seller has terminated this Agreement as of right under Section 13.1.

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

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

14.           INDEMNIFICATION.

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

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

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

(C) OWNERSHIP AND OPERATION.  ALL LOSSES ARISING FROM SELLER’S OWNERSHIP AND OPERATION OF THE ASSETS PRIOR TO THE EFFECTIVE TIME DIRECTLY ASSOCIATED WITH THE FOLLOWING MATTERS:

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(i)    DAMAGES TO PERSONS OR PROPERTY FOR CLAIMS ASSERTED BY ANY THIRD PARTY AND ACCRUING PRIOR TO THE EFFECTIVE TIME;

(ii)   THE VIOLATION BY SELLER OF THE TERMS OF ANY AGREEMENT BINDING UPON SELLER; AND

(iii)  CLAIMS AGAINST SELLER BY CO-OWNERS, PARTNERS, JOINT VENTURERS AND OTHER PARTICIPANTS IN THE WELLS.

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

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

(1) With regard to a breach of representations and warranties contained in Sections 7.1(A), (B), (C) and (D), for a period of one (1) year following the Closing;

(2) All of the other representations and warranties by Seller in this Agreement for a period of six (6) months following the Closing;

(3) With regard to a breach of covenants, an indefinite period following the Closing;

(4) With regard to the matters covered by Section 14.1 (C), for a period of six months after the Closing.

(ii)   The indemnification obligations of Seller pursuant to this Agreement shall be limited to actual Losses and shall not include incidental, consequential, indirect, punitive, or exemplary Losses or damages;

(iii)  Seller’s aggregate liabilities and obligations under this Article 14 shall not exceed ten percent (10%) of the Base Purchase Price;

(iv)  Seller shall have no liability or obligation for any Losses, unless and until and only to the extent that the aggregate Losses for which Buyer is entitled to recover under this Agreement exceeds one percent (1%) of the Base Purchase Price (the “Indemnity Deductible”) (such amount being a deductible and not a threshold).

(v)   Seller shall have no liability in excess of the Allocated Value, less any prior adjustments to the Base Purchase Price, for any Losses associated with the claim that Seller does not have Defensible Title associated with a particular Asset;

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

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

(viii) Buyer acknowledges and agrees that the indemnification provisions in this Article 14 and the termination rights in Article 13 shall be the exclusive remedies of Buyer with respect to the transactions contemplated by this Agreement.

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

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

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

(C) ASSUMED LIABILITIES.  ALL LOSSES ARISING FROM OR COMPRISING THE ASSUMED LIABILITIES.

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

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

15.           MISCELLANEOUS.

15.1           Casualty Loss.

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

(B) If, prior to the Closing, a Casualty occurs (or Casualties occur) which results in a reduction in the value of any of the Assets in excess of twenty-five percent (25%) of the Allocated Value of the affected Assets (“Casualty Loss”), (i) Seller may retain such Asset and such Asset shall be the subject of an adjustment to the Base Purchase Price in the same manner set forth in Section 5.4 hereof, or (ii) at the Closing, Seller shall assign to Buyer the right to receive all insurance proceeds or other sums payable to Seller by reason of such Casualty Loss, the Base Purchase Price shall not be adjusted by reason of such payment, and Seller shall convey the affected Assets to Buyer.

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

15.2           Confidentiality.

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

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

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

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

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SELLER:

Raven Resources, LLC

13220 North MacArthur

Oklahoma City, Oklahoma 73142

Attn:                      Mr. Michael Lee

Tel:  (405) 773-7340

Fax:  (405) 773-7488

BUYER:

Legacy Reserves Operating LP

303 West Wall, Suite 1600

Midland, Texas 79701

Attn:                      Mr. Kyle A. McGraw

Tel: (432) 682-2516

Fax: (432) 684-3774

With copy to:  Cotton, Bledsoe, Tighe & Dawson

500 W. Illinois, Suite 300

Midland, Texas   79701

Attention:  Bill Howard

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

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

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

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

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

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15.8           Fees, Expenses, Taxes and Recording.

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

(B) Buyer shall file all necessary Tax returns and other documentation with respect to all transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees, and, if required by applicable law, Seller shall join in the execution of any such Tax returns and other documentation.  Notwithstanding anything set forth in this Agreement to the contrary, Buyer shall pay any transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees incurred in connection with this Agreement and the transactions contemplated hereby.  Buyer shall also pay any equipment lease transfer fees or other fees or expenses incurred in connection with transfer of the Assets to Buyer except as otherwise provided by this Agreement.

(C) Buyer shall, at its own cost, immediately record all instruments of conveyance and sale in the appropriate office of the state and county in which the lands covered by such instrument are located.  Buyer shall immediately file for and obtain the necessary approval of all federal, Indian, tribal or state government agencies to the assignment of the Assets.  The assignment of any state, federal or Indian tribal oil and gas leases shall be filed in the appropriate governmental offices on a form required and in compliance with the applicable rules of the applicable government agencies.  Buyer shall supply Seller with a true and accurate photocopy reflecting the recording information of all the recorded and filed assignments within a reasonable period of time after their recording and filing.  In the event that Seller undertakes to record and/or file the conveyance instruments and other documents associated with this transfer of interest, Buyer shall reimburse Seller for all associated fees at Post Closing.

15.9           Assignment.  Subject to Section 10.5, this Agreement or any part hereof may not be assigned by either Party without the prior written consent of the other Party; provided, however, upon notice to the other Party, either Party shall have the right to assign all or part of its rights (but none of its obligations) under this Agreement in order to qualify transfer of the Assets as a “like-kind” exchange for federal tax purposes.  Subject to the foregoing, this Agreement is binding upon the Parties hereto and their respective successors and assigns.

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

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

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

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

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

Executed as of the day and year first above written.

SELLER: RAVEN RESOURCES
By:	/s/ David Stewart
	David Stewart
	Managing Member

	BUYER: LEGACY RESERVES OPERATING LP By: LEGACY RESERVES OPERATING GP LLC, its general partner
Date	By:	/s/ Kyle A. McGraw
		Kyle A. McGraw
		Vice President, Business Development and Land

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EX-10.3

Exhibit 10.3

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (referred to herein as the “Agreement”) is between SUMMIT PETROLEUM MANAGEMENT CORPORATION, a Texas corporation whose address is 550 West Texas, Suite 700, Midland, Texas 79701, SUMMIT PETROLEUM LLC, a Texas limited liability corporation whose address is 550 West Texas, Suite 700, Midland, Texas 79701 (all of which are collectively referred to herein as the “Seller(s)”) and LEGACY RESERVES OPERATING LP, a Delaware limited partnership whose address is ­­­­­­­­­­­­­­­­­­303 West Wall, Suite 1600, Midland, Texas 79701, (referred to herein as the “Buyer”) is made and entered August 28, 2007, to be effective for all intents and purposes as of the Effective Time designated herein.

Seller and Buyer for and in consideration of the mutual promises and covenants under this Agreement, the benefits to be derived by each party, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows:

ARTICLE 1

RECITALS

Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, certain oil and gas properties and related Properties on the terms and conditions set forth in this Agreement.

Seller and Buyer for and in consideration of the mutual promises and covenants under this Agreement, the benefits to be derived by each party, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, agree as follows:

ARTICLE 2

PURCHASE AND SALE

2.1           Purchase and Sale.  Seller agrees to sell and convey all of its right, title and interest in and to the Property or Properties (as defined in Article 2.2) and Buyer agrees to purchase the Property or Properties (as defined in Article 2.2), subject to the terms and conditions of this Agreement.

2.2           Properties Defined.  The undivided interest described as follows and on Exhibit “A” (hereafter called the “Property or Properties”), except as excluded in Article 2.2(e):

(a) Leases, Lands, Wells and Pooling and Unitization Agreements.  All of Seller’s right, title, and interest of whatever nature in all leasehold and other interests in; (i) the oil, gas and mineral leases limited to those portions described on Exhibit “A” and including the working and net revenue interests set forth therein (the “Leases”), insofar and only insofar as said Leases include and pertain to and cover the lands and depths as specifically described herein on attached Exhibit “A” (the “Lands”); (ii) the oil and gas wells located on the Leases or on Lands pooled or unitized therewith (the “Wells”) including those listed on Exhibit “A”; and (iii) the units, pooled acreage, spacing or proration units or other allocation of acreage applicable to the Wells established by or in accordance with the applicable state, federal or local law;

(b) Production.  Hydrocarbons produced from or allocable to the Wells for periods on or after the Effective Time (as defined in Section 2.3) and the proceeds therefrom;

(c) Equipment.  Personal property, equipment, fixtures, and improvements appurtenant to or located on the Leases or the Lands, or used or obtained in connection with the ownership or operation of the Properties, and

(d) Easements, Contracts, Land Files and Records.  (i) appurtenances, surface leases, easements, permits, licenses, servitudes and rights-of-way; (ii) all leases, farmout agreements, unitization agreements, pooling agreements, unit declarations, division orders, transfer orders, joint interest billings, accounting, production payment/payout records, operating contracts, excluding drilling rig contracts which are proprietary and non-assignable and any other applicable agreements and instruments, including to the extent assignable all applicable production sales agreements, the existing electric supply agreement and water disposal agreements (except as to the Windham 14 (STA) SWD System will be assigned to Buyer only to the extent that Buyer’s disposal volume needs are subordinate to Seller’s disposal volume needs on the Windham 14 SWD System), and (iii) all Records as are defined in Section 7.4 (b); however Seller retains such rights under this Section 2.2(d) to the extent necessary to enjoy the use and access to its other properties, leases and lands.

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(e) Excluded Properties.   Seller’s interest in these Properties has been collectively referred to  as “Property or Properties”, provided, however, the Property or Properties shall not include and there is excepted, reserved  and excluded from this Agreement  the produced water disposal system(s) and its associated facilities and equipment.

2.3           Effective Time.                                           The transfer of the Properties shall occur at Closing, which is defined in Article 7.1, effective as of 12:01 a.m., local time, September 1, 2007, (the “Effective Time”) on the Properties as described herein.

2.4           Oil in Storage.  All oil in storage at the Effective Time, including working inventory, belongs to Seller.  “Oil in Storage” for purposes of this Agreement, will mean all oil which was produced from the Properties and which was, on the Effective Time, stored in tanks located on the Properties (or located elsewhere but used by Seller to store oil produced from the Properties prior to delivery to oil purchasers) and above pipeline connections shall be deemed to have been produced before the Effective Time. Oil inventories will be valued based on the realized price received by Seller for oil sales, from the Properties on the Effective Date.

ARTICLE 3

PURCHASE PRICE

3.1           Purchase Price; Allocations.

(a) Amount. The Purchase Price of the Properties shall be a consideration equal to   FIFTEEN MILLION THREE HUNDRED THOUSAND ($15,300,000) (Subjectto adjustment only as hereinafter provided).

(b) Allocation.  Buyer has allocated the Purchase Price among the Properties including the undeveloped locations and behind pipe intervals, as set forth on Exhibit “A-1” attached hereto for the purpose of (1) establishing a basis for certain taxes, and (2) giving notices of value to the owners of any preferential rights to purchase the Properties, (3) determining the value of a Title Defect(s) and/or Environmental Defect(s), if any and (4) allocation of the Purchase Price to each individual Seller.

(c) All amounts required under this Article 3 to be paid by Buyer to Seller shall be made by wire transfer of immediately available funds to an account(s) designated by Seller which designation shall be made on or before the date said payment is due.  These amounts are subject to further adjustment after the Closing as provided in this Agreement.  Seller may delay or refuse to proceed with the Closing should Buyer refuse or fail to comply with payment provisions as set forth by Seller.  This right on the part of Seller is in addition to all other rights and remedies Seller may have under this Agreement, at law, or in equity.

(d) Buyer and Seller hereby agree that Seller, in lieu of the sale of the Properties to Buyer for the cash consideration provided herein, shall have the right at any time prior to the Closing to assign all or a portion of its rights under this Agreement to a qualified intermediary, in order to accomplish the transaction in a manner that will comply, either in whole or in part with the requirements of a like kind exchange pursuant to §1031 of the Internal Revenue Code of 1986, as amended.  In the event Seller does assign its rights under this Agreement pursuant to this Article 3.1(d), Seller agrees to notify Buyer in writing of such assignment not less than seven (7) days before Closing.  If Seller assigns its rights under this Agreement, Buyer (i) consents to Seller's assignment of its rights in this Agreement, and (ii) deposit the Purchase Price with the qualified escrow or qualified trust account at the Closing.

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(e) Buyer has deposited with Seller, and Seller acknowledges receipt of, a performance deposit in an amount which represents ten percent (10%) of the Purchase Price (the "Deposit"), which amount shall be held by Seller and distributed as follows:

(i) if this Agreement is terminated by mutual consent of the parties as provided in Article 8.1, the Deposit shall be returned by Seller to Buyer, without interest;

(ii) if this Agreement is terminated by either party pursuant to the termination right provided in Article 8.1 and at such time all of Buyer's conditions to Closing as set forth in Article 7.3 have not been satisfied (and such failure is not due to a breach by Buyer of its obligations hereunder), the Deposit shall be returned by Seller to Buyer without  interest;

(iii) if this Agreement is terminated by either party pursuant to the termination right provided in Article 8.1 and at such time all of Buyer's conditions to Closing as set forth in Article 7.3 have been satisfied, the Deposit shall be retained by Seller, and such shall constitute liquidated damages and Seller’s sole damages for any breach by Buyer of this Agreement causing its termination as set forth in this section; and

(iv) if Closing occurs, Seller shall apply the Deposit towards the Purchase Price.

(v) the Deposit shall be sent by wire transfer by end of business on August 31, 2007, as instructed by Seller.

   At Closing, Buyer shall pay to Seller the total Purchase Price set forth in Article 3.1(a) less an amount equal to the Deposit set forth in Article 3.1(e) and less any adjustments as set forth in Article 7.5

ARTICLE 4

TITLE & ENVIRONMENTAL

4.1           General Access.  Immediately upon execution of this Agreement and prior to Closing, Seller will provide Buyer, at Buyer’s sole risk, cost and expense, access at all reasonable times to the Properties and to the files, records, contracts, correspondence, maps, data, reports, plats, title opinions and title reports and other documents of Seller pertaining to the Properties for purposes of conducting due diligence to determine the existence of any Title Defects and/or Environmental Defects.

4.2           Seller’s Title.  Each Seller hereby warrants and represents by through and under each Seller, but not otherwise, to Buyer that each Seller's title to the Properties as of the Effective Time is (and as of the Closing will be) free of "Title Defects", as defined below.

4.3           Title Defect. The term “Title Defect” as used herein shall mean any encumbrance, encroachment, irregularity, defect in or objection to Seller’s title to the Properties (except Permitted Encumbrances) that alone or in combination with other defects renders Seller’s title to the Properties less than Defensible Title, as defined in Article 5.1(d) below, including; (i) liens securing unpaid indebtedness or taxes; (ii) preferential rights, consents to assignment and similar provisions of the type commonly encountered in the oil and gas industry; (iii) matters indicating that Buyer, or Buyer's successor could not successfully defend against a claim by any person or entity that a defect exists as to any Property; (iv) differences between the net revenue interest or the working interest as set out on Exhibit “A-1”, and the net revenue interest and working interest determined by Buyer pursuant to its review of title; (v) obligations to deliver production at a future date without payment for the production; and/or (vi) a default by Seller under some material provision of a lease, farmout agreement or agreement affecting any Property.

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4.4           Permitted Encumbrances.  “Permitted Encumbrances” shall mean: (i) minor defects in title which do not require the payment of money and otherwise do not have a material adverse effect on the value or operation of the affected portion of the Properties; (ii) liens for labor, services, materials or supplies furnished to the Properties which are not delinquent and which will be paid or discharged in the ordinary course of business; (iii) liens for taxes or assessments not yet due and not delinquent; (iv)  Lessor’s royalties, overriding royalties, division orders and similar burdens if the net cumulative effect of such burdens does not operate to reduce the net revenue interest from that set forth on Exhibit “A-1”;and (v) production sale contracts, so long as the prices payable under the contracts are representative of general arms length market prices being paid for similar production in the area, unitization and pooling declarations and agreements and any operating agreements, insofar as such contracts and agreements do not operate to increase the working interest or decrease the net revenue interest of Buyer from that stipulated on Exhibit “A-1” attached hereto; (vi) preferential rights to purchase and required third party consents to assignments and similar agreements with respect to which, prior to Closing, (A) waivers or consents are obtained from the appropriate parties, (B) the appropriate time period for asserting such rights has expired without an exercise of such rights, or (C) with respect to consent, failure to obtain consent does not affect the validity of an assignment to Buyer; (vii) all rights to consent by, required notices to, filings with, or other actions by Governmental Bodies in connection with the sale or conveyance of oil and gas leases or interests therein if the same are customarily obtained subsequent to such sale or conveyance; (viii) rights reserved to or vested in any municipality or governmental, statutory, or public authority to control or regulate any of the Properties in any manner, and all applicable laws, rules and orders of any governmental authority; (ix) such Title Defects as Buyer shall have waived; and (x) liens released at Closing.

4.5           Notice of Title Defects.  Buyer shall give Seller notice of any Title Defects as soon as practicable.  The notice shall:

(a) be in writing;

(b) describe in sufficient detail the nature of Title Defect and include appropriate evidence to substantiate the Title Defect;

(c) describe the steps and actions (in reasonable detail) which are necessary in Buyer’s opinion for the curing of identified Title Defects;

(d) be delivered to Seller as soon as possible, but no later than September 24, 2007

Buyer shall be deemed to have waived all Title Defects of which Seller has not been given the notice described in this Article 4.5.

4.6           Remedies for Title Defects.  Seller shall have until Closing (after receipt of Buyer’s notification as to a specific Title Defect) in which to provide Buyer written evidence that the subject Title Defect has been either cured or removed.  Should Seller fail or be unable to provide evidence of Title Defect curative or removal then Buyer may at its option:

(a) waive such Title Defect; or

(b) In the event the Seller and Buyer cannot mutually agree on a purchase price adjustment for an alleged Title Defect, Buyer shall have the right to (i) proceed to Closing and accept the Interest with no purchase price adjustment, or (ii)terminate this Agreement as to the Properties affected by the alleged Title Defect and receive a Purchase Price adjustment for such Properties as set forth in the allocation of value set forth in Exhibit “A-1”, or , where feasible, the proportionate allocated value; or.

(c) Buyer and Seller may proceed to Closing without any adjustment to the Purchase Price and Seller will have until the Post-Closing to provide evidence of cure of any such Title Defect. If Seller is unable to cure under this Section 4.6(c), Buyer shall be entitled to an adjustment at Post-Closing in accordance with Section 4.6(b).

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If the reduction in the Purchase Price from an aggregate total of all Title Defect adjustments does not exceed One Hundred Thousand Dollars ($100,000), then there shall be no adjustment to the Purchase Price. However, if the aggregate total of all Title Defects exceeds One Hundred Thousand Dollars ($100,000), then the Purchase Price shall be adjusted by the total amount of such Title Defects.

Should Seller be unable to provide evidence of Title Defect curative or desire to not make adjustment to the Purchase Price and it is determined by Seller that such Title Defect will materially and adversely reduce the net value of the Properties affected by an amount equal to or greater than ten percent (10%) of the Purchase Price, either Seller or Buyer may terminate this Agreement.  In such event, the Deposit shall be promptly returned to Buyer, without interest.

If Buyer notifies Seller of a Title Defect, as provided for in Section 4.5 which Buyer desires to have cured and for which an adjustment to the Purchase Price has been made in accordance with the terms of this Agreement, Seller agrees to cooperate with Buyer prior to or after the Closing in endeavoring to cure any such defects (but Seller shall have no obligation to pay money or to undertake any legal obligation in this regard).  Buyer agrees to bear the cost of examining the title data furnished by Seller as curative hereunder, if any, or obtained by Buyer.

4.7                      Environmental Defects. Buyer is aware that the interests and property have been used for exploration, development, and production of oil and gas and that there may be petroleum, produced water, wastes, or other materials located on or under the Property or associated with the interests. Equipment and sites included in the interests or property may contain asbestos, hazardous substances, or NORM. Notwithstanding anything to the contrary in this Agreement (including, without limitation, the provisions of Section 5.1(r) hereof), (a) this Section 4.7 and Section 10.3 contains all representations and warranties with regard to any Environmental Laws (as hereinafter defined) and, except as expressly set forth in this Section 4.7 and Section 10.3, SELLER EXPRESSLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, REGARDING OR IN ANY WAY RELATING TO OBLIGATIONS OR LIABILITIES UNDER ANY ENVIRONMENTAL LAWS OR THE ENVIRONMENTAL CONDITION OF THE PROPERTIES, and (b) it makes no representation or warranty of any kind whatsoever regarding the presence or absence of any naturally occurring radioactive materials ("NORMs") on or near any of the Properties, and Buyer shall not be entitled to any adjustment to the Purchase Price or any other remedy or settlement of any kind whatsoever except as provided for in this Section 4.7, and it shall have no obligation or liability of any kind whatsoever to Buyer or any of its successors or assigns, with respect to any NORMs. To the best of Seller’s knowledge, (i) neither the Properties nor the operation thereof are in violation of any Environmental Laws in any material respect and (ii) it has not received any notice from any Governmental Authority (as hereinafter defined) of any violation of any Environmental Laws. For purposes of this Agreement, the term "Environmental Laws" shall mean, as to any given Property, all laws, statutes, ordinances, rules and regulations of any Governmental Authority pertaining to protection of the environment in effect as of the Effective Time and as interpreted by court decisions or administrative orders as of the Effective Time in the jurisdiction in which such Property is located. For purposes of this Section 4.7 the term "Governmental Authority" shall mean, as to any given Property, the United States and the state, county, parish, city and political subdivisions in which such Property is located and which exercises jurisdiction over such Property, and any agency, department, board or other instrumentality thereof that exercises jurisdiction over such Property.

Upon Closing, Buyer will assume all liability for the assessment, remediation, removal, transportation, and disposal of wastes, asbestos, hazardous substances, and NORM from the interests and property and associated activities and will conduct these activities in accordance with all applicable laws and regulations, including the Environmental Laws.

Buyer will have until September 24, 2007 to notify Seller of any material adverse environmental condition associated with the Property that Buyer finds unacceptable and that has an estimated cost net to the Property greater than One Hundred Thousand Dollars ($100,000) and is documented by third party evidence of said condition for which remediation is required under any Environmental Law. Upon Seller’s receipt of such notification, Seller will have until two (2) days before the Closing Date in which to elect to:

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(a) proceed with Closing and either elect to remedy the condition or account for said costs for the remediation of the condition contained in Buyer’s notification as a normal pre-Effective Time operating expense item in the Post Closing Adjustment, or

 (b) remove the subject Property from this Agreement and adjust the Purchase Price based upon the allocation of value set forth in Exhibit A-1, or

(c)    terminate this Agreement if the total cost to remediate all Environmental Matters will exceed  ten percent (10%) of the Purchase Price.

Should Seller elect to remedy the condition set forth in Section 4.7 (a) above, Seller shall remain as operator of the Property and continue remediation of the condition until the first of the following occur:

(I) the appropriate governmental authorities provide written notice to Seller or Buyer that no further remediation of the condition is required to comply with the applicable Environmental Laws; or

(II) An independent third party determines to Seller’s and Buyer’s reasonable satisfaction that the condition has been remediated to the level required by the Environmental Laws or as mutually agreed to by Buyer and Seller.

Upon the occurrence of either (I) or (II) above, Seller will notify Buyer that remediation of the condition is complete and provide a copy of the notification provided in (I) above, if applicable. Upon delivery of Seller’s notice, Seller will be released from all liability and have no further obligations under Section 4.7 and Section 10.3 of this Agreement.

Buyer, for that period of time for which Buyer is operator of the Properties, Buyer will store, handle, transport, and dispose of or discharge all materials, substances, and wastes from the interests and property (including produced water, drilling fluids, NORM, and other wastes), whether present before or after the Effective Time, in accordance with applicable local, state, and federal laws and regulations. Buyer will keep records of the types, amounts, and location of materials, substances, and wastes that are transported, handled, discharged, released, or disposed of onsite and offsite.

Notwithstanding any other provision within this Section 4.7, Buyer shall have the right to waive all such Environmental Matters and proceed with Closing.

ARTICLE 5

REPRESENTATIONS AND WARRANTIES

5.1           Seller’s Representations and Warranties.  Each Seller represents and warrants, with respect to such Seller, to Buyer as follows:

(a) Description and Title.  Seller represents and warrants that Exhibit “A” sets forth a true, complete and legally sufficient description of the Properties.  It is understood that pursuant to this Agreement, Seller warrants title to the Properties as set forth on Exhibit “A” by, through and under Seller only, but not otherwise.

(b) Organization, Standing and Power.  To the extent that each Seller is a corporation, partnership or similar entity, the affected Seller is validly existing and in good standing under the laws of the State of  Texas and has all requisite powers and authority to own, lease, operate, sell and convey the Properties and to carry on its business as is now being conducted.

(c) Authority and Enforceability.  The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary action on the part of each party constituting Seller.  This Agreement is the valid and binding obligation of Seller, enforceable against each Seller in their respective proportionate ownership share in accordance with its terms.  Neither the execution and delivery by Seller of this Agreement nor the consummation of the transactions contemplated hereby nor the compliance by Seller with any of the provisions hereof will conflict with or result in a breach of any provision of Seller's organization documents or by-laws.  The execution and delivery hereof by Seller does not, and the fulfillment and compliance with the terms and conditions hereof, and the consummation of the transactions contemplated hereby, will not result in the creation or imposition of any lien, charge or other encumbrance on the Properties.

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(d)   Seller's Title to Properties.  Seller has Defensible Title to the Properties.  The term         “Defensible Title” shall mean in the case of the leasehold interests listed on Exhibit “A”, such right, title and interest (owned beneficially or of record) that, except for Permitted Encumbrances:

(i) is free from reasonable doubt that a prudent person engaged in the business of purchasing and owning, developing and operating producing oil and gas properties with knowledge of all of the facts and their legal effect would be willing to accept the title;

(ii) entitles Seller to receive not less than the interest set forth in Exhibit “A-1” as the net revenue interest with respect to all of the oil, gas, and hydrocarbon minerals produced, saved and marketed from each unit or well, as the case may be, that relates to Seller’s producing interval in the lands and depths included within each property identified in Exhibit “A-1”;

(iii) obligates Seller to pay costs and expenses relating to the operations on and the maintenance and development of each unit or well, as the case may be, that relates to Seller’s producing interval in the lands and depths included within each property, in an amount not greater than the working interest set forth in Exhibit “A-1”;

(iv) is free and clear of any mortgages, pledges, deeds of trust, hypothecations and production payments, except for the DML Properties which currently partially secures a line of Credit between WM. Mark Cranmer, Trustee and JPMorgan Chase Bank N.A. as Lender and Summit Petroleum LLC, et al as borrower (recorded May 14, 2007, INS. No. 101006, Vol. 82, Page 346 in the Official Public Records of Reagan County, Texas, which will be released no later than 5 days prior to Closing;

For purposes of this Article 5.1(d), “owned beneficially or of record” means Seller’s ownership interest reflected of record in the office of the county clerk in the county where the relevant lands are located, ownership interests reflected with respect to federal or state owned lands, in the office of the federal or state agency having jurisdiction, subject to and as impacted by the terms and provisions of the Permitted Encumbrances.

(e) Liability for Brokers’ Fees.  Seller has not incurred any liability, contingent or otherwise, for brokers’ or finders’ fees relating to this Transaction for which Buyer shall have any responsibility whatsoever.

(f) Insurance.  Seller shall maintain through the Closing with respect to the Properties its existing insurance coverage.

(g) Compliance with Law.  Seller has not received a written notice of a material violation of any statute, law, ordinance, regulation, permit, rule or order of any federal, state, tribal or local government or any other governmental department or agency, or any judgment, decree or order of any court, applicable to the Properties or operations on the Properties, which remains uncured.

(h) Plugging Obligations.  To the best of Seller’s knowledge, except for the Nordic B No. 4 Well , there are no dry holes or shut-in or otherwise inactive wells, located on the Properties on lands pooled or unitized therewith that Seller has the current obligation to plug and abandon.

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(i) Governmental Permits.  To the best of Seller’s knowledge, Seller has all governmental licenses, filings and permits (including, without limitation, permits, licenses, approval registrations, notifications, exemptions and any other authorizations pursuant to Law) necessary or appropriate to own and operate the Properties as presently being owned and operated.  To the best of Seller’s knowledge, Seller has not received written notice of any violations in respect of any such licenses or permits that remains uncured.

(j) Personal Property and Equipment.  Seller has not removed any personal property, equipment and fixtures from the Wells, unless it has been replaced with personal property, equipment and fixtures of similar grade and utility.  Unless removed, repaired or replaced with personal property, equipment and fixtures or similar grade and utility, the personal property, equipment and fixtures currently attendant to the Wells was the equipment historically used on the Wells to produce the Hydrocarbons prior to the execution of this Agreement.  

(k) No Alienation.  Within 120 days of the date hereof, Seller has not sold, assigned, conveyed, or transferred or contracted to sell, assign, convey or transfer any right or title to, or interest in, the Properties other than (i) production sold in the ordinary course of Seller’s business and (ii) equipment which was worthless, obsolete or replaced by equipment of equal suitability and value.

(l) Property Expenses.  In the ordinary course of business, Seller has paid all costs and expenses attributable to the period of time prior to the Effective Time as such costs and expenses become due, and such costs and expenses are being paid in a timely manner before the same become delinquent, except such costs and expenses as are disputed in good faith by Seller in a timely manner and for which Seller shall retain responsibility.

(m) Records.   Seller makes no representations regarding the accuracy of any of the Records; provided, however, Seller does represent that (i) all of the Records are files, or copies thereof, that Seller has used in the ordinary course of operating and owning the Properties, (ii) Seller has not intentionally withheld any material information from the Records or (iii) Seller has not intentionally misrepresented any material information in the Records.  Except as set forth in this Section 5.1, no representation or warranty of any kind is made by Seller as to the information or with respect to the Properties to which the information relates and Buyer expressly agrees that any conclusions drawn therefrom shall be the result of its own independent review and judgment. The representations contained in this paragraph shall apply only to matters of fact, and shall not apply to any information, data, printouts, extrapolations, projections, documentation, maps, graphs, charts, or tables which reflect, depict, present, portray, or represent, or which are based upon or derived from, in whole or in part, interpretation of the information including, but not limited to, matters of geological, geophysical, engineering, or scientific interpretation.

(p) Gas Imbalances.  To the best of Seller’s knowledge, no gas imbalance exists with respect to the Properties.

(q) Leases.  To the best of Seller's knowledge, the Leases have been maintained according to their material terms, in compliance with the agreements to which the Leases are subject, and are presently in full force and effect.  To the best of Seller's knowledge, there has not occurred any event, fact or circumstance which with the lapse of time or the giving of notice, or both, would constitute such a material breach or default on behalf of Seller under the provisions of the Leases.

(r) Litigation.  To the best of Seller’s knowledge, there are no actions, suits, claims, proceedings, agency enforcement actions or investigations pending, or to the best knowledge of Seller, threatened against or affecting the Properties.  There is no suit, action, claim, investigation or inquiry by any person or entity or by any administrative agency or governmental body and no legal, administrative or arbitration proceeding pending, or, to the best knowledge of Seller threatened against Seller which has affected or could affect Seller's ability to consummate the transaction contemplated by this Agreement.

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5.2           Buyer’s Representations and Warranties.  Buyer represents and warrants to Seller as follows:

(a) Organization, Standing and Power.  Buyer is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite powers and authority to own, lease and operate the Properties and to carry on its business as is now being conducted in the jurisdictions where the nature of its properties or business so requires such qualification.

(b) Authority and Enforceability.  The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby, have been duly and validly authorized by all necessary corporate action on the part of Buyer.  This Agreement is the valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms.  Neither the execution and delivery by Buyer of this Agreement nor the consummation of the transactions contemplated hereby nor the compliance by Buyer with any of the provisions hereof will conflict with or result in a breach of any provision of Buyer's articles and by-laws.  The execution and delivery hereof by Buyer does not, and the fulfillment and compliance with the terms and conditions hereof and the consummation of the transactions contemplated hereby will not, result in the creation or imposition of any lien, charge or other encumbrance on the Properties.

(c) Warranty Maintenance.  Buyer shall cause all the representations and warranties of Buyer contained in this Agreement to be true and correct on and as of the Closing Date.

(d) Buyer represents that it did not solely rely upon representations or materials provided to Buyer by Seller or Seller’s marketing agents in evaluating the Properties, but rather has also relied upon its individual evaluations and due diligence.

(e)     Buyer represents that it has sufficient funds on hand or commitments from one or more  banking institutions to fund payment of the Purchase Price at the Closing.

5.3           Liability Regarding Access.  In connection with Buyer’s access to the Properties prior to Closing for due diligence review, Buyer waives and releases all claims, whether known or unknown, against Seller, Seller’s partners, Seller’s and each partner’s parent, subsidiary companies or other affiliates, and directors, officers, employees, consultants or agents of such parties, respectively, for injury to, or death of persons or for damage to property suffered by Buyer’s employees, agents, representatives, consultants or contractors arising in any way from the conduct of Buyer’s investigations and examinations of the Properties or the exercise of such rights of access.  Buyer shall indemnify Seller, Seller’s partners, Seller’s and each such partner’s parent and subsidiary companies and other affiliates, and directors, officers, employees, consultants and agents of such parties, respectively, from and against any and all claims, actions, liabilities, losses, damages, costs or expenses (including, but not limited to court costs and attorney’s fees) whatsoever suffered or incurred by Buyer’s  employees, agents, representatives, consultants or contractors arising out of the exercise of such rights of investigation and examination (or exercise of such right of access).

ARTICLE 6

COVENANTS

6.1           Covered Area.  This Agreement is limited to the Properties.

6.2           Existing Agreements, Assignments and Conveyances.  This Agreement and the Assignment of Oil and Gas Leases are further subject to the terms and conditions of all existing agreements, assignments and conveyances.

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6.3           New Agreements and Sales.  Unless this Agreement is terminated as provided for herein, Buyer and/or Seller will not, without the prior written consent of the other: a) enter into any new agreements or commitments with respect to the Properties which extend beyond the Effective Time; b) except as set forth in Schedule 6.3, drill any new wells, abandon any existing wells or release or abandon all or any portion of the lands included within any lease or modify or terminate any contracts and agreements affecting the Properties and sell or otherwise dispose of any of the Properties or any part thereof, other than personal property and equipment unless it is replaced with personal property and equipment of equivalent quality and value.  From the date hereof until the Closing, Seller shall maintain the Properties in a good and workmanlike manner consistent with past practice.

6.4           Maintenance of Seller's Business.  Seller shall carry on the business of Seller with respect to the Properties in substantially the same manner as Seller has heretofore and shall not introduce any new method of management, operation or accounting with respect to the Properties.

6.5           Notification of Breach.  Seller shall promptly notify Buyer (i) if any representation or warranty of Seller contained in this Agreement is discovered to be or becomes untrue or (ii) if Seller fails to perform or comply with any covenant or agreement contained in this Agreement or it is reasonably anticipated that Seller will be unable to perform or comply with any covenant or agreement contained in this Agreement.

ARTICLE 7

CLOSING

7.1   Date and Place of Closing  The purchase by Buyer and the sale by Seller of the Properties as contemplated by this Agreement (the "Closing") shall be held on or before October 1, 2007 (the “Closing Date”), at the offices of Summit Petroleum LLC in Midland, Texas.  However, Buyer may, at its option and upon approval by Seller, accelerate the date of the Closing upon giving Seller three (3) business days prior written notice, if, on or before the date of such notice, Buyer has also notified Seller of any Title Defects and any Environmental Defects as provided for herein.  Additionally, the parties may mutually agree in writing on a different date and place for the Closing.

7.2           Conditions of Closing by Seller.  The obligation of Seller to close is subject to the satisfaction of the following conditions:

(a) All representations and warranties of Buyer contained in this Agreement shall be true, correct, and not misleading in all material respects, and Buyer shall have performed and satisfied all agreements and covenants in all material respects required by this Agreement to be performed and satisfied by Buyer; and

(b) No suit or other proceeding shall be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or declare illegal, or seeking substantial damages in connection with the transaction contemplated hereby.

(c) Should there be downward adjustments to the Purchase Price in excess of ten percent (10%) of the Purchase Price, due to asserted Title Defects and Environmental Defects; Seller has the option to terminate this Agreement with no liability to Buyer other than return of the Deposit.

7.3           Conditions of Closing by Buyer.  The obligation of Buyer to close is subject to the satisfaction of the following conditions:

(a) All representations and warranties of Seller contained in this Agreement shall be true, correct, and not misleading in all material respects, and Seller shall have performed and satisfied all agreements and covenants in all material respects required by this Agreement to be performed and satisfied by Seller;

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(b) No suit or other proceeding shall be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or declare illegal, or seeking substantial damages in connection with the transaction contemplated hereby; and

(c) Should there be downward adjustments to the Purchase Price in excess of ten percent (10%) of the Purchase Price, due to asserted Title Defects and Environmental Defects; Buyer has the option to terminate this Agreement with no liability to Buyer other than return of the Deposit.

(d) No material adverse change in the condition of or title to the Properties shall have occurred subsequent to the Effective Time, except depletion through normal production within authorized allowables, ordinary changes in rates of production, and depreciation of equipment through ordinary wear and tear.

7.4           Closing Obligations.  At the Closing, the following shall occur:

(a) Seller shall execute, acknowledge and deliver to Buyer, the original Assignment of Oil and Gas Leases and Bill of Sale attached hereto as Exhibit “B” (the “Assignment”), conveying title to the Properties to Buyer, as well as such certificates or other documents as are required to effect the transfer of the Properties.

(b) All books, records and files  in the possession of Seller pertaining to the Properties, including, without limitation, the following, if and to the extent that such files exist: all books, records, reports, manuals, files, title documents, including correspondence, records of production and maintenance, revenue, sales, expenses, warranties, lease files, land files, well files, title opinions and title reports, abstracts, division order files, assignments, contract files, operations files, copies of tax and accounting records (but excluding Federal and state income tax returns and records) and files, maps, core data, hydrocarbon analysis, well logs, mud logs, field studies together with other files, contracts and other records and data including all geological, geophysical (including any micro seismic) and engineering information, except for that data prohibited by third party confidentiality agreements (the “Records”), shall be made available for delivery to Buyer, at Buyer’s cost, at Seller’s offices where currently maintained, within fifteen (15) business days after the Closing.  Seller shall have the right to retain copies of the Records (and receive from Buyer, at Seller’s expense, copies of Records requested by Seller from Buyer in the future) and to retain canceled checks and general ledger, purchasing and other general accounting records of Seller.  Buyer’s reliance on same shall be at Buyer’s sole risk.

                (c)           Seller shall deliver to Buyer exclusive possession of the Exhibit “A” interests.

(d) Seller and Buyer shall execute, acknowledge and deliver such transfer orders or letters in lieu thereof as Buyer may request, directing all purchasers of production to make payment of proceeds attributable to production from the Properties after the Effective Time to Buyer.

(e) Buyer shall deliver the cash consideration of the total Purchase Price to Seller by Wire Transfer on the date of Closing as adjusted to reflect the Deposit and matters described in Article 7.5. To the extent that actual amounts are not available, the parties will use reasonable estimates of such amounts less any adjustments due to Title Defects and/or Environmental Matters as applicable as set out in Article 4.

(f) Seller will provide such reasonable assistance to Buyer as Buyer may request in order for Buyer to prepare its required SEC filings.

(g) Seller will provide Buyer with executed assignments of assignable contracts which relate to the Properties.

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7.5           Adjustments and Accounting.  Any adjustments pursuant to this Article will be made at Closing, utilizing estimates where necessary. Seller will prepare and deliver to Buyer not less than three (3) days before Closing a preliminary Closing settlement Statement reflecting the adjustments called for in this Article 7.5. The parties shall sign the agreed upon settlement statement at Closing. Seller shall prepare a final Post Closing settlement statement containing adjustments, including but not limited to the following, and will be made within, and only within, ninety (90) days of Closing.

(a)                 Upward Adjustments.  The Purchase Price shall be adjusted upward by the following:

(i) The amount of all direct costs and expenditures chargeable to Seller's interest incurred and paid by Seller:

(A) that are attributable to the drilling, completion, recompletion, reworking, operation and maintenance of the Properties on and after the Effective Time;

(B) bonuses, lease rentals and shut-in payments due after (and expressly excluding those due before) the Effective Time;

(C) ad valorem, property and other taxes that are allocated to the Buyer pursuant to Article 7.5(d) herein below; and

(D) amounts relating to obligations arising under the Contracts relating to the Properties with respect to operations or production after the Effective Time;

(ii) The value of all Hydrocarbons, which have been produced and are merchantable, and are in storage and/or credited to the Properties as of the Effective Time, net of all severance taxes, and less an appropriate deduction based on industry practice for basic sediment, water and other non-merchantable liquids; and

(iii) Any other amount agreed upon by Seller and Buyer

       (b)           Downward Adjustments.  The Purchase Price shall be adjusted downward by the following:

(i) The amount of all proceeds received by Seller that are attributable to its ownership and the operation of the Properties on or after the Effective Time;

(ii) The following amounts to the extent paid by Buyer:

(A) all direct unrelated costs and expenditures chargeable to Seller's interest that are attributable to the drilling, completion, recompletion, reworking, operation and maintenance of the Properties prior to the Effective Time;

(B) all bonuses, lease rentals and shut-in payments due prior to the Effective Time; and

               (iii)           Those amounts resulting from Title Defects and/or Environmental Defects, as provided in Article 4; and

               (iv)           Any other amount agreed upon by Seller and Buyer.

(c)                 Seller shall be entitled to all proceeds and shall be responsible for all expenses accruing to the Properties prior to the Effective Time and Buyer shall be entitled to all proceeds and shall be responsible for all expenses accruing to the Properties, including plugging of the wells, after the Effective Time.

(d)                 All taxes, real property taxes and similar obligations for the current year shall be prorated based upon the prior year’s tax rates if tax statements for the current year have not been received by Seller within ninety (90) days following Closing.

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The parties have determined that the Hart-Scott-Rodino Antitrust Improvements Act of 1976 does not apply to this transaction.

ARTICLE 8

TERMINATION

8.1           Termination.  This Agreement and the transactions contemplated may be terminated in the following instances:

(a) by Buyer or Seller in accordance with Article 4.6 concerning Remedies for Title Defects and Article 4.7 Remedies for Environmental Defects;

(b) by Buyer if the conditions set forth in Article 5.1 and/or Article 7.3 are not satisfied in all

material respects or waived prior to the Closing, and notwithstanding any other provisions of   this Agreement to the contrary, by Buyer if the Buyer is not in default hereunder and the Closing has not occurred on or before October 8, 2007;

(c) by Seller if the conditions set forth in Article 5.2 and/or Article 7.2 are not satisfied in all material respects or waived prior to the Closing Date, and notwithstanding any other provisions of this Agreement to the contrary, by the Seller if the Seller is not in default hereunder and the Closing has not occurred on or before October 8, 2007; or

(d)           by the mutual written agreement of Buyer and Seller

8.2           Remedies.  If Closing does not occur on the Closing Date, as that may be extended by Seller and Buyer hereunder, due to Seller's breach of the terms of this Agreement, then Buyer may either declare this Agreement terminated and of no further force or effect and receive the prompt return of the Deposit or seek specific performance of this Agreement. If Closing does not occur due to Buyer's breach of the terms of this Agreement, Seller may declare this Agreement terminated and of no further force or effect and retain the Deposit as liquidated damages and not as a penalty for such breach. It is agreed that actual damages would be difficult to ascertain and that the amount of the liquidated damages is reasonable. Upon termination of this Agreement, Seller shall be free immediately to enjoy all rights of ownership of the Properties and to sell, transfer, encumber or otherwise dispose of the Properties to any party without any restriction under this Agreement.

ARTICLE 9

DISCLAIMER

ANY ASSIGNMENT AND BILL OF SALE EXECUTED PURSUANT HERETO SHALL BE EXECUTED WITHOUT ANY EXPRESS OR IMPLIED WARRANTY OR REPRESENTATION AS TO THE MERCHANTABILITY OF ANY OF THE WELLS OR EQUIPMENT OR THEIR FITNESS FOR ANY PURPOSE, AND WITHOUT ANY OTHER EXPRESS OR IMPLIED WARRANTY OR REPRESENTATION WHATSOEVER EXCEPT AS EXPRESSLY SET FORTH IN SAID ASSIGNMENT AND BILL OF SALE.  IT IS UNDERSTOOD AND AGREED THAT BUYER SHALL HAVE INSPECTED THE PROPERTY AND PREMISES AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, AND THAT BUYER SHALL ACCEPT ALL OF THE SAME IN THEIR “AS IS, WHERE IS” CONDITION.  IN ADDITION NEITHER, SELLER, NOR SELLER’S REPRESENTATIVE (SUMMIT PETROLEUM LLC), MAKES ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, INFORMATION OR MATERIALS HERETOFORE OR HEREAFTER FURNISHED BUYER IN CONNECTION WITH THE PROPERTIES, OR AS TO THE QUALITY OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE PROPERTIES OR THE ABILITY OF THE PROPERTIES TO PRODUCE HYDROCARBONS.  ANY AND ALL SUCH DATA, INFORMATION AND OTHER MATERIALS FURNISHED BY SELLER AND SELLER’S REPRESENTATIVE IS PROVIDED BUYER AS A CONVENIENCE AND ANY RELIANCE ON OR USE OF THE SAME SHALL BE AT BUYER’S SOLE RISK.  BUYER EXPRESSLY WAIVES THE PROVISIONS OF CHAPTER XVII, SUBCHAPTER E, SECTIONS 17.41 THROUGH 17.63, INCLUSIVE (OTHER THAN SECTION 17.555, WHICH IS NOT WAIVED), VERNON’S TEXAS CODE ANNOTATED BUSINESS AND COMMERCE CODE (THE “DECEPTIVE TRADE PRACTICES ACT”).

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ARTICLE 10

ASSUMPTIONS AND INDEMNIFICATION

10.1 BUYER’S ASSUMPTION AND INDEMNIFICATION; POTENTIAL THIRD PARTY LIABILITIES.  EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, BUYER AGREES UPON THE OCCURRENCE OF CLOSING (I) TO ASSUME, AND TIMELY PAY AND PERFORM, ALL DUTIES, OBLIGATIONS AND LIABILITIES RELATED TO THE OWNERSHIP AND/OR OPERATION OF THE PROPERTIES, INSOFAR AND ONLY INSOFAR AS SUCH DUTIES, OBLIGATIONS AND LIABILITIES ARISE AND ARE ATTRIBUTABLE TO PERIODS FROM AND AFTER THE EFFECTIVE TIME AND LIMITED (AND ATTRIBUTABLE) TO THE INTERESTS INTHE PROPERTIES ASSIGNED TO BUYER BY SELLER (COLLECTIVELY, THE ASSUMED LIABILITIES) INCLUDING , WITHOUT LIMITATION, THOSE ARISING UNDER THE CONTRACTS AND AGREEMENTS DESCRIBED IN ARTICLE 2.2, AND (II) TO INDEMNIFY AND HOLD SELLER, ITS RELATED ENTITIES AND AFFILIATES, AND THE DIRECTORS, OFFICERS , EMPLOYEES CONSULTANTS AND AGENTS OF SUCH PARTIES, RESPECTIVELY HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, ACTIONS, LIABILITIES, LOSSES, DAMAGES, COSTS OR EXPENSES (INCLUDING COURT COSTS AND ATTORNEYS’ FEES) OF ANY KIND OR CHARACTER ARISING OUT OF OR OTHERWISE RELATING TO THE ASSUMED LIABILITIES. IN CONNECTION WITH (BUT NOT IN LIMITATION OF) THE FOREGOING, BUT SUBJECT TO THE OTHER PROVISIONS OF THIS AGREEMENT, IT IS SPECIFICALLY UNDERSTOOD AND AGREED THAT ASSUMED LIABILITIES SHALL INCLUDE ALL OBLIGATIONS TO PROPERLY PLUG AND ABANDON, OR RE-PLUG AND RE-ABANDON, ANY WELLS PRODUCING, SHUT-IN, OR DRILLED ON OR AFTER THE EFFECTIVE DATE AND LOCATED ON THE PROPERTIES. HOWEVER, EXCEPT FOR BUYER’S OBLIGATIONS SET FORTH UNDER ARTICLE 10.3, BUYER SHALL NOT INDEMNIFY OR HOLD SELLER HARMLESS FOR CLAIMS, COSTS, EXPENSES AND LIABILITIES INCURRED BY SELLER WITH RESPECT TO THE SALE OF THE PROPERTIES TO BUYER, OR THE NEGOTIATIONS LEADING TO SUCH SALE, OR THOSE THAT RESULT FROM OR ARE ATTRIBUTABLE TO ANY REPRESENTATION OF SELLER CONTAINED IN THIS AGREEMENT BEING UNTRUE OR A BREACH OF ANY WARRANTY OR COVENANT OF SELLER CONTAINED IN THIS AGREEMENT.

10.2 LIMITATIONS ON DAMAGES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE OR SPECULATIVE DAMAGES OF  ANY OTHER PARTY ARISING OUT OF OR RELATING TO, IN ANY MANNER, THIS AGREEMENT, THE TRANSACTION CONTEMPLATED HEREUNDER, OR THE PROPERTIES; PROVIDED, HOWEVER THAT THIS WAIVER SHALL NOT AFFECT OR RELEASE ANY CLAIMS OF THIRD PARTIES (BEING PERSONS, ENTITIES OR GOVERNMENTAL AUTHORITIES WHO ARE NOT THE BUYER AND NOT THE SELLER) FOR WHICH A PARTY IS OBLIGATED TO INDEMNIFY THE OTHER UNDER THIS AGREEMENT.

10.3  Assumption and Indemnification of Environmental Matters. Buyer agrees and acknowledges that (i) it has had, or prior to the Closing will have access to and the opportunity to inspect the Properties for all purposes, including without limitation, for the purposes of detecting the presence of hazardous or toxic substances, pollutants or other contaminants, environmental hazards, naturally occurring radioactive materials (NORM) and produced water contamination of the surface and/or subsurface, (ii) it has, or prior to the Closing will have, satisfied itself as to the physical and environmental condition of the Properties, both surface and subsurface, and their method of operation and except as set forth herein, agrees to accept an assignment of the Properties at Closing on an “AS IS, WHERE IS” BASIS, “WITH ALL FAULTS”,  and (iii) in making the decision to enter into this Agreement and consummate the transactions contemplated hereby, Buyer has relied solely on the basis of its own independent investigation of the Properties and the records related thereto.

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UPON CLOSING, BUYER HEREBY ASSUMES AND SHALL BE RESPONSIBLE FOR AND AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS SELLER FROM AND AGAINST ANY AND ALL CLAIMS, LIABILITY OR LOSSES, (INCLUDING, WITHOUT LIMITATION, LOSSES FROM DAMAGE TO PROPERTY, ALLEGED GROUNDWATER CONTAMINATION, INJURY TO OR DEATH OF PERSONS OR OTHER LIVING THINGS, NATURAL RESOURCE DAMAGES, CERCLA RESPONSE COSTS, ENVIRONMENTAL REMEDIATION AND RESTORATION COSTS OR FINES) OR PENALTIES ARISING OUT OF OR ATTRIBUTABLE TO, IN WHOLE OR IN PART BY A VIOLATION OF, FAILURE TO FULFILL DUTIES IMPOSED BY OR INCURRENCE OF LIABILITY UNDER ANY COMMON LAW RELATING TO HUMAN HEALTH, SAFETY OR THE ENVIRONMENT OR ANY ENVIRONMENTAL LAWS (AN “ENVIRONMENTAL MATTER”) OCCURRING AT ANY TIME BEFORE, AT OR AFTER THE EFFECTIVE TIME WITHOUT REGARD TO THE SOLE, PARTIAL OR CONCURRENT NEGLIGENCE, STRICT LIABLITY OR OTHER FAULT OF THE SELLER, REGARDLESS OF WHEN THE EVENTS THAT CAUSED SUCH CONDITION TO EXIST OR THE OBLIGATION TO ARISE, PROVIDED, HOWEVER, THAT SELLER SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS THE BUYER FROM AND AGAINST ANY AND ALL LOSSES RESULTING FROM ANY ENVIRONMENTAL MATTER OCCURRING AT ANY TIME PRIOR TO THE EFFECTIVE TIME TO THE EXTENT THAT SUCH LOSSES RESULT FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLER OR THAT HAVE BEEN ASSERTED IN A THIRD-PARTY LAWSUIT OR ADMINISTRATIVE PROCEEDING OR ORDER THAT IS FILED, ISSUED OR COMMENCED AGAINST SELLER OR HAS BEEN DOCUMENTED BY BUYER TO SELLER IN WRITING ON OR BEFORE THE CLOSING DATE.

10.4   Occasional Sale.  Since this transaction is an isolated or occasional sale, no tax will be collected from Buyer. If, however, this transaction is later deemed to be other than an occasional sale, Buyer agrees to be responsible, and shall indemnify and hold Seller harmless, for any and all sales or transfer taxes or fees (including related penalty, interest or legal costs) due by virtue of this transaction on the Properties assigned and conveyed, and the Buyer shall remit such sales or transfer taxes at that time. Seller and Buyer agree to reasonably cooperate with each other in demonstrating that the requirements for an occasional or isolated sale or any other sales tax exemption have been met.

ARTICLE 11

ARBITRATION AND MEDIATION

In case of a disagreement between the Parties to this Agreement as to any right, obligation, term or provision hereof or involving a total disputed amount or claim(s) equal to or greater than $25,000.00, the Parties shall make an earnest effort to settle such disagreement to their mutual satisfaction.  If any such dispute regarding this Agreement cannot be reconciled by the Parties to this Agreement, then any Party may provide notice to the other specifying with particularity the items of disagreement and a request that the matter be resolved by mediation.  Such notice shall include the name of a mediator acceptable to the Party requesting mediation.  If the dispute is not resolved by mediation to the satisfaction of the Parties, or if the Parties are unable to agree upon a mediator, within thirty (30) days after receipt of such written notice, then any such dispute shall be settled by arbitration and the results of such arbitration shall be binding upon all Parties to this Agreement in all respects as set forth below. Arbitration may be initiated by written notice from any Party to this Agreement to the other that the previously noticed dispute has not been resolved by mediation and is being submitted to arbitration under the terms of this Agreement.  A single arbitrator shall be chosen by the Parties to the dispute by submitting names of eleven (11) arbitrators experienced in the area of the dispute from a listing of twenty (20) arbitrators supplied by the American Arbitration Association.  Said selection by both Parties shall take place within ten (10) days after the Parties have received the listing from the American Arbitration Association.  The lists of the Parties shall be compared and the first name to appear on both lists shall be the arbitrator of the dispute.  Should either Party fail or refuse to submit a list of eleven arbitrators then the other Party shall select an arbitrator who shall be the sole arbitrator and shall resolve the dispute as set out herein.  All arbitrators shall be individuals who have had prior experience in oil and gas exploration and production and shall function as independent and neutral arbitrators.  In the selection of arbitrators, the Parties shall take into consideration the nature of the matter submitted for arbitration.  (Thus, for example, professional engineers should be selected to arbitrate issues which are primarily engineering in nature and accountants who are members of the Council of Petroleum Accountants Societies should be selected to arbitrate matters which are primarily accounting in nature.)  Arbitrations under this paragraph shall be conducted under the Texas Arbitration Statute (Vernon’s Ann. Tex. Civ. St. Arts. 224 to 238-6) and shall apply Texas law.  All matters concerning the conduct of the arbitrators shall be governed by the provisions of the American Arbitration Association.  No dispute related to this Agreement shall be brought before any court of law or equity; however, judgment upon the award or decision rendered by the arbitrators may be entered in any court having jurisdiction.

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ARTICLE 12

MISCELLANEOUS

12.1                      Notices.  All notices required or permitted under this Agreement shall be in writing, and any notice hereunder shall be deemed to have been made when delivered whether by: (i) hand; (ii) overnight delivery service; (iii) telecopy; (iv) electronic or (v) first class certified mail, postage prepaid, with return receipt requested, to the address as set forth below.  Either party may, by written notice deliver to the other, change the address to which notices shall be delivered.

  Legacy Reserves Operating LP

  303 West Wall, Suite 1600

  Midland, Texas 79702

Fax: (432) 684-3774

Phone: (432) 682-2516

kmcgraw@legacylp.com

Attention: Mr. Kyle A. McGraw

Summit Petroleum Management Corporation

550 West Texas, Suite 700

Midland, Texas 79701

Fax: (432) 682-9809

Phone:  (432) 682-9800

jbehrmann@summitpetroleumllc.com

Attention:  Mr. James J. Behrmann

12.2           Reservations and Exceptions.  Sale and purchase of the Properties is made subject to all reservations, exceptions, limitations, contracts and other burdens or instruments which are of record or of which Buyer has actual or constructive notice, including any matter included or referenced in the materials made available by Seller to Buyer.

12.3           Entire Agreement.  This instrument states the entire agreement between Buyer and Seller and supersedes all other agreements, either written or oral, between Seller and Buyer concerning the sale and purchase of the Properties.  This Agreement may be supplemented, altered, amended, modified or revoked in writing only, signed by all of the parties.  No material representation, warranty, covenant, agreement, promise, inducement or statement, whether oral or written, has been made by Seller or Buyer and relied upon by the other that is not set forth in this Agreement or in the instruments referred to herein, and neither Seller nor Buyer shall be bound by or liable for any alleged representation, warranty, covenant, agreement, promise, inducement or statement not so set forth.

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12.4           Survival.  All representations, warranties and covenants made herein by Buyer and Seller shall be continuing and shall be true and correct on and as of the Closing Date with the same force and effect as if made at that time and all such representations, warranties and covenants shall, subject to the limitations set forth below, survive the Closing and deliverance of the Assignment for a period of six (6) months.   Notwithstanding the foregoing, the representations and warranties of Seller under Article 5.1(d) shall terminate immediately upon Closing and any liability of Seller (or any party claimed to be liable by, through or under Seller) for damages, losses or costs alleged to arise from the breach, falsity, failure or violation of the representations and warranties under Article 5 shall be limited to the allocated Purchase Price for the affected Property or Properties.

12.5           Assignability.  This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns; provided, however, neither Buyer or Seller may, prior to the Closing, assign its rights or delegate its duties or obligations under this Agreement without the prior written consent of the other party.

12.6           Publicity.   Seller and Buyer shall consult with each other with regard to all publicity and other releases at or prior to the Closing concerning this Agreement and the transaction contemplated hereby and except as required by applicable law or other applicable rules or regulations of any governmental body or stock exchange, neither party shall issue any publicity, public notice concerning the Purchase Price or other release without the prior written consent of the other party.

12.7           Further Assurance.  After Closing each of the parties shall execute, acknowledge and deliver to the other such further instruments, and take such other actions as may be reasonably necessary to carry out the provisions of this Agreement.  However, Buyer shall assume all responsibility for notifying the purchaser of oil and gas production from the Properties, and such other designated persons who may be responsible for disbursing payments for the purchase of such production, of the change of ownership of the Properties.  Seller shall take all actions necessary to effectuate the transfer of such payments to Buyer as of the Effective Time.

12.8           Destruction.  For a period of five (5) years after the Closing Date (or for such longer period as may be required by law or governmental regulation), Buyer shall not intentionally destroy or give up possession of any original or final copy of the documents delivered by Seller to Buyer hereunder without first offering Seller the opportunity (by delivery of written notice to Seller), at Seller’s expense (without any payment to Buyer), to obtain such original or final copy or a copy thereof.

12.9           Headings.  The headings are for guidance only and shall have no significance in the interpretations of this Agreement.

12.10                      Counterpart Execution.  This Agreement may be executed by Buyer and Seller in any number of counterparts, no one of which need be executed by all parties.  Each of such counterparts shall be deemed an original instrument, and all counterparts shall together constitute but one and the same instrument.  This agreement shall become operative when each party has executed at least one counterpart. The return of executed documents by facsimile or electronic transmission shall be effective between the parties and shall be followed by the return of executed originals.

12.11                      Severance.  If any provision of this Agreement shall be determined void, illegal or unenforceable, all of the other provisions of this Agreement shall remain in full force and effect, and the provision or provisions that are determined to be void, illegal or unenforceable shall be limited so that they shall remain in effect to the extent permitted by law.

12.12          Relationship of the Parties.   This Agreement does not create and shall not be construed to create a partnership, association, joint venture or a fiduciary relationship of any kind or character between any parties to this Agreement (including one individual Seller to another Seller or Seller to Buyer) and shall not be construed to impose any duty, obligation or liability arising from such a relationship by or with respect to any party to this Agreement.

12.13                      No Third-Party Beneficiaries.  This Agreement is not intended to confer upon any person not a party hereto any rights or remedies hereunder, and no person other than the parties hereto is entitled to rely on any representation, covenant or agreement contained herein.

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12.14  Governing Law.  THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS WITHOUT REFERENCE TO CONFLICT OF LAWS.  THE PARTIES AGREE THAT ANY LITIGATION RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT MUST BE BROUGHT BEFORE AND DETERMINED BY A COURT OF COMPETENT JURISDICTION IN MIDLAND COUNTY, TEXAS.

12.15   Audit Rights.

Seller agrees to make available to Buyer prior to and for a period of twelve months following Closing any and all existing information and documents in the possession of Seller that Buyer may reasonably require to comply with Buyer’s tax and financial reporting requirements and audits.  Without limiting the generality of the foregoing, Seller will use its commercially reasonable efforts after execution of this Agreement and for twelve months following Closing to cooperate with the independent auditors chosen by Buyer (“Buyer’s Auditor”) in connection with their audit of any annual revenue and expenses statements of the Assets that Buyer or any of its Affiliates requires to comply with their tax and financial reporting requirements, and their review of any interim quarterly revenue and expense statements of the Assets that Buyer requires to comply with such reporting requirements.  Buyer’s cooperation will include (i) such reasonable access to Seller’s employees who were responsible for preparing the revenue and expense statements and work papers and other supporting documents used in the preparation of such financial statements as may be required by Buyer’s Auditor to perform an audit in accordance with generally accepted auditing standards, and (ii) delivery of one or more customary representation letters (in substantially the form previously approved by Seller and Buyer) from Seller to Buyer’s Auditor that are requested by Buyer to allow such auditors to complete an audit (or review of any interim quarterly financials), and to issue an opinion that in Buyer’s experience is acceptable with respect to an audit or review of those revenue and expense statements required pursuant to this Section.  Buyer will reimburse Seller, within three (3) business days after demand therefore, for any reasonable out-of-pocket and overhead costs with respect to any costs incurred by Seller in complying with the provisions of this Section 12.15.

12.16  Board Approval.      This Agreement is expressly subject to Buyer obtaining approval of the board of directors of its general partner, which approval shall be obtained on or before August 31, 2007.  In the event Buyer does not notify Seller of such board approval on or before 5:00 pm Central Standard Time, August 31, 2007, this Agreement shall terminate and be of no further force and effect.

EXECUTED this 28^th day of August, 2007.

SELLER: SUMMIT PETROLEUM MANAGEMENT CORPORATION
By:	/s/ Dennis R. Johnson
	Dennis R. Johnson
	President & CEO

SUMMIT PETROLEUM LLC
By:	/s/ Dennis R. Johnson
	Dennis R. Johnson
	President & CEO

BUYER: LEGACY RESERVES OPERATING LP, a Delaware limited partnership BY: Legacy Reserves Operating GP LLC, its general partner By: Legacy Reserves LP, its sole member By: Legacy Reserves GP, LLC, its general partner
By:	/s/ Kyle A. McGraw
	Kyle A. McGraw
	Executive Vice President Business Development and Land

Page 18of 18

EX-10.4

Exhibit 10.4

PURCHASE AND SALE AGREEMENT

BY AND BETWEEN

THE OPERATING CO., et al AS SELLER

AND

LEGACY RESERVES OPERATING LP, AS BUYER

TABLE OF CONTENTS

                                                                                                                                                            0;                                                                                                                                                                          & #160;                                                                        PAGE

1.	SALE AND PURCHASE OF THE ASSETS.	1
1.1	Acquired Assets	1
1.2	Excluded Assets.	2
1.3	Assumed Liabilities	2
2.	PURCHASE PRICE.	3
2.1	Base Purchase Price.	3
2.2	Deposit.	3
2.3	Adjustments to the Base Purchase Price	3
2.4	Allocation	4
3.	CLOSING.	5
3.1	Closing.	5
3.2	Delivery by Seller	5
3.3	Delivery by Buyer	6
3.4	Further Cooperation	6
4.	ACCOUNTING ADJUSTMENTS.	6
4.1	Closing Adjustments.	6
4.2	Strapping and Gauging	6
4.3	Taxes	7
4.4	Post-Closing Adjustments	7
4.5	Suspended Funds	8
4.6	Cooperation	8
5.	DUE DILIGENCE: TITLE MATTERS.	9
5.1	General Access	9
5.2	Defensible Title	9
5.3	Defect Letters.	11
5.4	Effect of Title Defect	12
5.5	Preferential Rights and Consents.	14
6.	ENVIRONMENTAL ASSESSMENT.	15
6.1	Physical Condition of the Assets	15
6.2	Inspection and Testing.	16
6.3	Notice of Adverse Environmental Conditions	17
6.4	Rights and Remedies for Adverse Environmental Conditions.	17
6.5	Remediation by Seller	19
7.	REPRESENTATIONS AND WARRANTIES OF SELLER.	20
7.1	Seller’s Representations and Warranties	20
7.2	Scope of Representations of Seller.	22
8.	REPRESENTATIONS AND WARRANTIES OF BUYER.	23
8.1	Buyer’s Representations and Warranties	23
9.	CERTAIN AGREEMENTS OF SELLER	24
9.1	Maintenance of Assets	24
9.2	Records	25
9.3	Audit Rights.	25

Page i

10.	CERTAIN AGREEMENTS OF BUYER	26
10.1	Plugging Obligation	26
10.2	Plugging Bond	26
10.3	Seller’s Logos	26
10.4	Like-Kind Exchanges	26
11.	CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER	26
11.1	No Litigation	26
11.2	Representations and Warranties	26
12.	CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER	27
12.1	No Litigation	27
12.2	Representations and Warranties	27
13.	TERMINATION.	27
13.1	Causes of Termination	27
13.2	Effect of Termination.	28
14.	INDEMNIFICATION.	28
14.1	Indemnification by Seller	29
14.2	Indemnification by Buyer	31
14.3	Physical Inspection	31
14.4	Notification	31
15.	MISCELLANEOUS.	32
15.1	Casualty Loss.	32
15.2	Confidentiality.	32
15.3	Notices	33
15.4	Press Releases and Public Announcements	33
15.5	Compliance with Express Negligence Test	34
15.6	Governing Law	34
15.7	Exhibits	34
15.8	Fees, Expenses, Taxes and Recording.	34
15.9	Assignment	35
15.10	Entire Agreement	35
15.11	Severability	35
15.12	Captions	35
15.13	Time of the Essence	35
15.14	Counterpart Execution.	35
15.15	Preferential Right to Purchase	35

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EXHIBITS

A	Oil and Gas Leases and Land
B	Wells Allocation
C	Equipment
D	Excluded Assets
E	Form of Assignment and Bill of Sale
F	Services Agreement
G	Lease Agreement
7.1(E)	AFE’s
7.1(G)	Pending Litigation
7.1(K)	Material Agreements
7.1(L)	Consents and Preferential Purchase Rights
7.1(P)	Calls on Production

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PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement (this “Agreement”) is entered into this 30th day of August, 2007, but effective as of 7:00 a.m. (Central Time) on September 1, 2007 (the “Effective Time”), by and between The Operating Co., a Texas corporation, Nova Oil & Gas, Inc., a Texas corporation, X-Pert Corporation, a Texas corporation, The 195 AF, Ltd., a Texas family limited partnership, Cowboy Crude Oil & Gas, F.L.P.,  a Texas family limited partnership, and Cottonhead, Ltd., a Texas limited partnership (collectively referred to as “Seller”) and Legacy Reserves Operating LP, a Delaware limited partnership (“Buyer”). Buyer and Seller are collectively referred to herein as the “Parties” and sometimes individually referred to as a “Party.”

RECITALS:

A. Seller desires to sell to Buyer certain oil, gas and mineral properties and other assets on the terms and conditions set forth in this Agreement.

B. Buyer desires to purchase from Seller such oil, gas and mineral properties and other assets on the terms and conditions set forth in this Agreement.

WITNESSETH:

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

1.           SALE AND PURCHASE OF THE ASSETS.

1.1           Acquired Assets.  Subject to the terms and conditions of this Agreement, Seller agrees to sell, convey and deliver to Buyer and Buyer agrees to purchase and acquire from Seller the following (collectively, the “Assets”):

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

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

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

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

(E) To the extent assignable, all governmental permits, licenses and authorizations, as well as any applications for the same, related to the Leases, Land, Pooled Land and Wells or the use thereof; and

(F) All of the files, records, and data of Seller relating to the items described in subsections (A), (B), (C), (D) and (E) above (the “Records”), including, without limitation, lease records, well records, and division order records; well files and prospect files; title records (including abstracts of title, title opinions and memoranda, and title curative documents related to the Leases and Wells); contracts and contract files; correspondence; computer data files; micro-fiche data files; geological, geophysical and seismic records, interpretations, data, maps and information, production records, electric logs, core data, pressure data, decline curves and graphical production curves; and accounting records, to the extent only that the Records can be transferred without violation of any third-party restriction and are not protected by Seller’s attorney-client privilege.

1.2           Excluded Assets.  Notwithstanding the foregoing, the Assets shall not include, and there is excepted, reserved and excluded from the sale contemplated hereby the property described on Exhibit D attached hereto.

1.3           Assumed Liabilities.  Subject to the terms of this Agreement, if Closing occurs, Buyer shall assume and agree to timely and fully pay, perform and otherwise discharge, without recourse to Seller or its affiliates, all of the liabilities and obligations of Seller and its affiliates, predecessors, successors, assigns or representatives, direct or indirect, known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, which relate, directly or indirectly, to the Assets, whether such liabilities and obligations accrue before, on or after the Effective Time (collectively, the “Assumed Liabilities”).  Notwithstanding the foregoing, the Assumed Liabilities shall not include, and there is excepted, reserved and excluded from the Assumed Liabilities, the liabilities and obligations for which Seller indemnifies Buyer pursuant to Section 14.1.

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2.           PURCHASE PRICE.

2.1           Base Purchase Price.  The purchase price for the Assets is SIXTY MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($60,500,000.00) Base Purchase Price(the “Base Purchase Price”), subject to the adjustments provided for herein.

2.2           Deposit.  Within three (3) days of the execution of this Agreement, Buyer shall deliver to Seller, in cash by wire-transfer in immediately available funds to an account designated by Seller, a Deposit in an amount equal to THREE MILLION TWENTY FIVE THOUSAND AND NO/100 DOLLARS ($3,025,000.00) (such amount together with all accrued interest thereon, the “Deposit”).  Prior to Closing, the Deposit shall be maintained by Seller in an interest bearing account.  The Deposit shall be distributed to Seller and credited to the Base Purchase Price at Closing, or if this Agreement is terminated, shall be distributed or retained pursuant to Article 13.  In the event the Deposit is not delivered to Seller as prescribed, this Agreement shall terminate.  This Agreement is expressly subject to Buyer obtaining approval of the board of directors of its general partner, which approval shall be obtained within three (3) business days after the execution of this Agreement.  In the event Buyer does not notify Seller of such board approval within three (3) business days after the execution of this Agreement, this Agreement shall terminate and be of no further force and effect.

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

(A) The Base Purchase Price shall be adjusted upward by:

           (i)        any amount determined to be due Seller pursuant to Section 4.2;

(ii) Property Taxes and Severance Taxes related to the Assets paid by Seller for the period following the Effective Time as determined pursuant to Section 4.3;

(iii) an amount equal to the costs, expenses and other expenditures (whether capitalized or expensed) paid by Seller in accordance with this Agreement that are attributable to the Assets for the period from and after the Effective Time;

(iv) for all operated wells, a monthly overhead fee of $400, prorated for partial months, per active Well while Seller is operating the Assets from and after the Effective Time;

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

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(vi) an amount equal to $7,873 per day for each day from, but not including, October 1, 2007 until Closing, representing the daily interest accruing on the Base Purchase Price less the Deposit, based on a 5% annual rate of interest;

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

(B) The Base Purchase Price shall be adjusted downward by:

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

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

(iii) all amounts related to Title Defects as determined pursuant to Section 5.4, consents and preferential rights as determined pursuant to Section 5.6, Adverse Environmental Conditions as determined pursuant to Section 6.4, Exclusion Adjustments as determined pursuant to Sections 5.6 or 6.4, and Casualty Losses as determined pursuant to Section 15.1;

(iv) Property Taxes and Severance Taxes related to the Assets to be paid by Seller for the period prior to the Effective Time as determined pursuant to Section 4.3;

(v) the amount of the Deposit; and

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

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

2.4           Allocation.  The Base Purchase Price shall be allocated to the Assets as set forth in Exhibit B.  The Parties agree that the values allocated to various portions of the Assets, which are set forth on Exhibit B (singularly with respect to each item, the “Allocated Value” and collectively, the “Allocated Values”), shall be binding on Seller and Buyer and shall be used only for the purposes of adjusting the Base Purchase Price pursuant to Sections 4.3 (relating to Taxes), 5.4 (relating to Title Defects), 15.1 (relating to Casualty Losses), and 6 (relating to Adverse Environmental Conditions), and are not intended as a measure of value for any other purpose.

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3.           CLOSING.

3.1           Closing.  The sale and purchase of the Assets (“Closing”) shall be held at 9:00 a.m. on October 1, 2007 (“Closing Date”); provided however, that Buyer shall have the right to extend the Closing Date until October 15, 2007, at 9:00 a.m. by giving Seller written notice of such extension prior to October 1, 2007.  In the event Buyer extends the Closing Date as provided above, the Base Purchase Price shall be increased as set forth in Section 2.3(A)(vi).  The Closing will take place at the offices of Seller, in Pampa, Texas.

3.2           Delivery by Seller.  At Closing, Seller shall deliver to Buyer (with all documents to be prepared by Buyer or Buyer’s counsel except those documents required under subsection E, I and L below):

(A) A separate Assignment and Bill of Sale executed by Seller for each jurisdiction where the Assets are located, substantially in the form attached hereto as Exhibit E, effecting the sale, transfer, conveyance and assignment of the Assets, with (i) a special warranty of the real property title by, through and under Seller but not otherwise, and (ii) with all personal property and fixtures conveyed “AS IS, WHERE IS,” with no warranties whatsoever, express, implied or statutory;

(B) Any governmental forms required to effect transfer in accordance with applicable regulations, including appropriate state and federal assignments of record title and operating rights executed by Seller;

(C) Executed letters in lieu of transfer orders instructing purchasers of production to pay to Buyer the proceeds of sales of Oil and Gas from the Assets;

(D) Executed change of operator forms as required by applicable governmental regulation;

(E) Executed releases of any mortgages or financing statements in favor of any third party that may be currently encumbering the Assets;

(F) An executed Closing Adjustment Statement;

(G) An executed Non-Foreign Affidavit of Seller;

(H) Possession of the Records and all other Assets;

(I) The suspensed funds pursuant to Section 4.5;

(J) Services Agreement executed by Seller providing for the contract services of  David Smith ($750 per month) and J. D. Carr ($3,000 per month) for a period of one year from Closing in the form of Exhibit F attached hereto (the “Services Agreement”);

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(K) An executed Lease Agreement in the form of Exhibit G attached hereto covering the Office and Yard located at 1211 N. Price Rd, Pampa, Texas, as further described on Exhibit G attached hereto, providing for a real property lease at $4,500 per month for a term of one year (the “Lease Agreement”); and

(L) Shareholder or partner resolutions, as applicable, of each Seller, certified by the secretary or other appropriate officer of each Seller or of its general partner, authorizing the execution and performance of this Agreement and the transactions contemplated hereby.

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

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

 (B) An executed Closing Adjustment Statement;

(C) Executed counterparts of the Assignment and Bill of Sale;

(D) Executed counterparts of the Services Agreement; and

(E) Executed counterparts of the Lease Agreement.

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

4.           ACCOUNTING ADJUSTMENTS.

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

4.2           Strapping and Gauging  Seller will cause the Oil and Gas in the storage facilities located on, or utilized in connection with, the Leases to be measured, gauged or strapped as of the Effective Time.  Seller will cause the production meter charts (or if such do not exist, the sales meter charts) on the pipelines transporting Oil and Gas from the Leases to be read as of such time.  The Oil and Gas in such storage facilities above six inches or through the meters on the pipelines as of the Effective Time shall belong to Seller and shall be valued based on the price actually paid for Oil and Gas produced from the Assets for the month prior to the Effective Time, and the Oil and Gas placed in such storage facilities after the Effective Time and production upstream of the aforesaid meters shall belong to Buyer and become part of the Assets.  Buyer or Buyer’s representative shall have the option to witness the gauging by Seller.  In the event Buyer or Buyer’s representative exercising the option to witness the gauging by Seller, Buyer agrees that the waiver and release provisions set forth in Section 5.1(A) of this Agreement shall apply thereto.  This provision should not apply to any Assets that are not operated and/or owned by Seller.  There shall be no settlement for Stock in Tanks on non-operated or non-owned Assets.

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4.3           Taxes.

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

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

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

4.4           Post-Closing Adjustments

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

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

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

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

4.5           Suspended Funds.  At the Closing, Seller shall provide to Buyer a listing showing all proceeds from production attributable to the Leases which are currently held in suspense and shall transfer to Buyer all of those suspended proceeds.  Buyer shall be responsible for proper distribution of all the suspended proceeds, to the extent turned over to it by Seller, to the parties lawfully entitled to them and any claims related thereto, and Buyer hereby agrees to indemnify, defend and hold harmless Seller from and against any and all claims, liabilities, losses, costs and expenses arising out of or relating to those suspended proceeds and any claims related thereto after the Effective Time.  Seller shall remain responsible and liable for any claims, liabilities, losses, costs and expenses arising out of or relating to those suspended proceeds and any claims related thereto through the Closing Date.

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

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5.           DUE DILIGENCE: TITLE MATTERS.

5.1           General Access.

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

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

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

(A) As to the Assets, that record title of Seller which:

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

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

(B) That title of Seller to the Assets is free and clear of liens, encumbrances and defects that materially and adversely affect the ownership, operation or use of the Assets, except for Permitted Encumbrances.

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

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

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

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

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

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

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

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

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

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

(10) All rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Assets in any manner, and all applicable laws, rules and orders of governmental authority;

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

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

(13)          Assumed Liabilities of Buyer as set out herein.

5.3           Defect Letters.

(A) Buyer may from time to time and no later than three (3) business days prior to Closing notify Seller in writing (a “Notice”) of any matter which would cause title to all or part of the Assets not to be Defensible Title (“Title Defect”), provided that no Title Defect shall be deemed to exist unless the Title Defect Value thereof exceeds Ten Thousand Dollars ($10,000.00). Further, there shall be no adjustment to the Base Purchase Price unless the aggregate Title Defect Values of all Title Defects satisfying the condition in clause (i) exceed one percent (1%) of the Base Purchase Price (the “Title Defect Threshold”) (such amount being a threshold, not a deductible).  In order to provide Seller a reasonable opportunity to cure any Title Defects prior to Closing, Buyer shall use reasonable efforts to provide the Notice as soon as reasonably possible after becoming aware of or making its determination of the Title Defect.

(B) In the Notice, Buyer must describe with reasonable detail each alleged Title Defect it has discovered and the steps required to cure each Title Defect, include Buyer’s reasonable estimate of the Title Defect Value attributable to each, and include all data and information in Buyer’s possession or control bearing thereon.  Subject to the special warranty in the Assignment and Bill of Sale delivered at Closing, Buyer shall be deemed to have conclusively waived all Title Defects not disclosed to Seller in a Notice on or before three (3) business days prior to Closing.

(C) Upon timely delivery of a Notice by Buyer:

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

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

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

(iv) if at any time any Title Consultant so chosen fails or refuses to perform hereunder, a new Title Consultant shall be chosen by the Parties.  The cost of any such Title Consultant shall be borne fifty percent (50%) by Seller and fifty percent (50%) by Buyer.  Each Party shall present a written statement of its position on the Title Defect and/or Title Defect Value in question to the Title Consultant within five (5) days after the Title Consultant is selected, and the Title Consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) business days of receipt of such position statements.  The determination by the Title Consultant shall be conclusive and binding on the Parties, and shall be enforceable against any Party in any court of competent jurisdiction.  If necessary, the Closing Date shall be deferred only as to those Assets affected by any unresolved disputes regarding the existence of a Title Defect and/or the Title Defect Value until the Title Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Seller and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than thirty (30) days beyond the scheduled Closing Date in Section 3.1.  Once the Title Consultant’s determination has been expressed to both Parties, if applicable, Seller shall have five (5) days in which to advise Buyer in writing which of the options available to Seller under Section 5.4 that Seller elects regarding each of the Assets as to which the Title Consultant has made a determination.  In evaluating whether a Title Defect exists, due consideration shall be given to the length of time that the particular Asset has been producing Oil and Gas and whether such fact, circumstance or condition is of the type expected to be encountered in the area involved and is usual and customarily acceptable to reasonable and prudent operators, working interest owners and/or purchasers engaged in the business of the exploration, development, and operation of oil and gas properties.

5.4           Effect of Title Defect

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

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(i) adjust the Base Purchase Price in the amount of the Title Defect Value of the Asset to which such Title Defect relates and proceed to Closing on all Assets; or

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

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

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

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

(iii) Notwithstanding the above, in no event shall the total of the Title Defect Values related to a particular Asset exceed the Allocated Value of such Asset.

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

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5.5           Preferential Rights and Consents.  Seller shall use its best efforts to obtain all required consents and to give notices required in connection with preferential purchase rights, so that the third party election date to exercise the preferential right will occur at least seven (7) business days prior to Closing.  If Buyer discovers other affected Assets during the course of Buyer’s due diligence activities, Buyer shall notify Seller immediately and Seller shall use its best efforts to obtain such consents and to give the notices required in connection with the preferential rights prior to Closing.

(A) Consents.  Except for consents and approvals which are customarily obtained post-Closing, if a necessary consent to assign any Lease has not been obtained as of the Closing, then (i) the portion of the Assets for which such consent has not been obtained shall not be conveyed at the Closing, (ii) the Allocated Value for that Asset shall not be paid to Seller, and (iii) Seller shall use best efforts to obtain such consent as promptly as possible following Closing.  If such consent has been obtained as of the date on which the Post-Closing Adjustment Statement becomes final, Seller shall convey the affected Asset to Buyer effective as of the Effective Time and Buyer shall pay Seller the Allocated Value of the affected Asset, less any proceeds from the affected Asset received by Seller attributable to the period of time after the Effective Time (calculated in accordance with Section 2.3).  If such consent has not been obtained or has not been waived by Buyer as of the date on which the Post-Closing Adjustment Statement becomes final, Seller shall elect either to (i) challenge in court the enforceability of such consent right, in which event Seller shall retain the affected Asset until such legal challenge is finally resolved by settlement or non-appealable court order, after which either Seller shall convey the affected Asset to Buyer under the terms of this Agreement and Buyer shall pay the Allocated Value for such Asset, less any proceeds received by Seller attributable to such Asset for the period from and after the Effective Time (calculated in accordance with Section 2.3) or (ii) retain the affected Asset and the Base Purchase Price shall be reduced by an amount equal to the Allocated Value of the retained Asset (with such adjustment being an “Exclusion Adjustment”).  Buyer shall reasonably cooperate with Seller in obtaining any required consent including providing assurances of reasonable financial conditions, but Buyer shall not be required to expend funds or make any other type of financial commitments a condition of obtaining such consent.

(B) Preferential Purchase Rights.

 (i) If any preferential right to purchase any portion of the Assets is exercised prior to the Closing Date, or if the time frame for the exercise of such preferential purchase rights has not expired and Seller has not received notice of an intent not to exercise or waiver of the preferential purchase right, that portion of the Assets affected by such preferential purchase right shall be excluded from the Assets and the Base Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such affected Assets without the requirement for Buyer to give notice (with such adjustment being an “Exclusion Adjustment”). Notwithstanding any other provision in this Agreement, if a preferential purchase right subject to this Agreement is exercised, Buyer has the right, at its sole discretion, to terminate this Agreement, provided that the Allocated Value of all preferential rights exercised is equal to or exceeds ten percent (10%) of the Base Purchase Price.

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(ii) If a third party exercises its preferential right to purchase, but fails to consummate the purchase prior to the Closing, Seller shall retain the affected Assets and the Base Purchase Price shall be adjusted downward by an amount equal to the Allocated Value of such affected Assets (with such adjustment being an “Exclusion Adjustment”).

(iii) If a third party exercises its preferential right to purchase, but does not consummate the purchase within the time frame specified in the preferential purchase right, Seller agrees to convey the affected Asset to Buyer effective as of the Effective Time, and Buyer agrees to pay Seller the Allocated Value of the Affected Asset.

(iv) If a preferential purchase right is not discovered prior to Closing, and the affected Asset is conveyed to Buyer at Closing, and the preferential purchase right is exercised and subsequently consummated after Closing, Buyer agrees to convey such affected Assets to the party exercising such right on the same terms and conditions under which Seller conveyed such Assets to Buyer and retain all amounts paid by the party exercising such preferential right to purchase.  In the event of such exercise, Buyer shall prepare, execute and deliver a form of conveyance of such Asset to such exercising party, such conveyance to be in form and substance as provided in this Agreement, and Seller agrees to hold harmless and indemnify Buyer from any and all liabilities and obligations associated with such conveyed Asset, and to reimburse Buyer for reasonable expenses incurred by Buyer relating to the conveyed Asset.

(C) Exclusive Remedy.

  The remedies set forth in this Section 5.5 are the exclusive remedies under this Agreement for exercised preferential purchase rights and required consents to assign the Assets.

6.           ENVIRONMENTAL ASSESSMENT.

6.1           Physical Condition of the Assets.

(A) Buyer acknowledges that the Assets have been used for oil and gas drilling and production operations and possibly for the storage and disposal of waste materials or hazardous substances related to standard oil field operations.  Physical changes in or under the Assets or adjacent lands may have occurred as a result of such uses.  The Assets also may contain previously plugged and abandoned wells, buried pipelines, storage tanks and other equipment, whether or not of a similar nature, the locations of which may not now be known by Seller or be readily apparent by a physical inspection of the Assets.  Buyer understands that Seller does not have the requisite information with which to determine the exact nature or condition of the Assets nor the effect any such use has had on the physical condition of the Assets.  Pursuant to the Safe Water Drinking and Toxic Enforcement Act of 1986, Buyer is hereby notified and assumes the risk that detectable amounts of chemicals known to cause cancer, birth defects and other reproductive harm may be found in, on or around the Assets.  Upon consummation of the Closing Buyer shall be deemed to have assumed the risk of expense, claim, damage or liability arising from any such matter referred to in this section, including without limitation the risk that the Assets may contain waste or contaminants and that adverse physical conditions, including the presence of waste or contaminants, may not have been revealed by Buyer’s investigation.  Consummation of the Closing shall transfer all responsibility and liability related to disposal, spills, waste or contamination on or below the Assets from Seller to Buyer.

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

6.2           Inspection and Testing.

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

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

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

6.3           Notice of Adverse Environmental Conditions.  No later than three (3) business days prior to Closing, Buyer shall notify Seller in writing of any Adverse Environmental Condition with respect to the Assets.  Such notice shall describe in reasonable detail the Adverse Environmental Condition and include the estimated Environmental Defect Value attributable thereto (the “Environmental Defect Notice”) based on a verifiable estimate of the cost to Remediate the Adverse Environmental Condition.  No Adverse Environmental Condition shall be deemed to exist unless the Environmental Defect Value exceeds Ten Thousand Dollars ($10,000.00) in each individual case.  Further, there shall be no adjustment to the Base Purchase Price unless the aggregate Environmental Defect Values of all Adverse Environmental Conditions satisfying the condition in clause (i) exceeds one percent (1%) of the Base Purchase Price (the “Environmental Defect Threshold”) (such amount being a threshold, not a deductible).  The “Environmental Defect Value” attributable to any Adverse Environmental Condition shall be the estimated amount (net to Seller’s interest) of all reasonable costs and claims necessary to Remediate the Adverse Environmental Conditions, as reasonably determined and estimated by Buyer.  The term “Adverse Environmental Condition” means (i) the failure of the Assets to be in material compliance with all applicable Environmental Laws; (ii) the Assets being subject to any agreements, consent orders, decrees or judgments currently in existence based on any Environmental Laws that negatively and materially impact the future use of any portion of the Assets or that require any material change in the present conditions of any of the Assets; or (iii) the Assets being subject to any material uncured notices of violations of or non-compliance with any applicable Environmental Laws or any Lease or agreement.  Buyer shall be deemed to have conclusively waived (i) all Adverse Environmental Conditions not contained in an Environmental Defect Notice delivered to Seller on or before three (3) business days prior to Closing and (ii) any remedy against Seller for such Adverse Environmental Conditions.

6.4           Rights and Remedies for Adverse Environmental Conditions.

(A) With respect to any Adverse Environmental Conditions affecting one or more of the Assets which exceed the Environmental Defect Threshold, Seller may on an Asset-by-Asset basis (i) Remediate the Adverse Environmental Conditions prior to Closing, but Seller shall have no obligation to do so, and proceed to Closing with no adjustment of the Base Purchase Price; (ii) proceed to Closing and adjust the Base Purchase Price in an amount equal to the applicable Environmental Defect Value; or (iii) retain the affected Asset and reduce the Base Purchase Price by the Allocated Value of the affected Asset (“Exclusion Adjustment”).

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

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

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

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

(F) If Seller and Buyer are unable to agree on the amount of the Environmental Defect Value within ten (10) business days after Seller’s receipt of the Environmental Defect Notice or that an Adverse Environmental Condition exists, has been Remediated or is required to be Remediated, then the dispute will be submitted to a mutually acceptable company with recognized expertise in the oil and gas environmental remediation and regulation field (the “Environmental Consultant”) whose determination shall be final and binding upon the Parties.  Seller and Buyer shall each bear their respective costs and expenses incurred in connection with any such dispute, and one-half (1/2) of the fees, costs and expenses charged by the Environmental Consultant.  Each Party shall present a written statement of its position on the Adverse Environmental Condition and/or the Environmental Defect Value in question to the Environmental Consultant within five (5) business days after the Environmental Consultant is selected, and the Environmental Consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) business days of receipt of such position statements.  If necessary, the Closing Date shall be deferred only as to those Assets affected by any unresolved disputes regarding the existence of an Adverse Environmental Condition and/or the Environmental Defect Value until the Environmental Consultant has made a determination of the disputed issues with respect thereto and all subsequent dates and required activities with respect to any such Assets having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless Seller and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than thirty (30) days beyond the scheduled Closing Date in Section 3.1.  All Assets as to which no such dispute(s) exist shall be conveyed to Buyer subject to the terms of this Agreement at Closing.  Once the Environmental Consultant’s determination has been expressed to both Parties, if applicable, Seller shall have five (5) business days in which to advise Buyer in writing which of the options available to Seller under Section 6.4(A) Seller elects regarding each of the Assets as to which the Environmental Consultant has made a determination.

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

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

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

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

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

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

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

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

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

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

7.           REPRESENTATIONS AND WARRANTIES OF SELLER.

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

(A) Status.  The Operating Co, Nova Oil & Gas, Inc., and X-Pert Corporation are each corporations duly organized, legally existing and in good standing under the laws of the State of Texas.   The 195 AF, Ltd, Cowboy Crude Oil & Gas, F.L.P., and Cottonhead, Ltd., are each limited partnerships duly organized, legally existing and in good standing under the laws of the State of Texas.

(B) Authority.  Seller owns the Assets and has the requisite power and authority to enter into this Agreement, to carry out the transactions contemplated hereby, to transfer the Assets in the manner contemplated by this Agreement, and to undertake all of the obligations of Seller set forth in this Agreement.

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

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

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

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

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

(H) Permits and Consents.  With respect to Assets for which Seller is the operator, Seller has (i) acquired all material permits, licenses, approvals and consents from appropriate governmental bodies, authorities and agencies to conduct operations on the Assets in compliance with applicable laws, rules, regulations, ordinances and orders; and (ii) is in material compliance with all such permits, licenses, approvals and consents.

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

(J) Taxes.  (i) Seller has filed (with respect to the Assets) all material returns for Property Taxes and Severance Taxes that are due, (ii) all payments (with respect to the Assets) shown to be due on such returns have been paid, and (iii) there is no material dispute or claim concerning any Property Tax or Severance Tax liability of the Seller (with respect to the Assets) claimed or raised by any tax authority in writing.

(K) Material Agreements.  To the best of Seller’s knowledge, all agreements material to the ownership, operation or value of the Assets are listed in Exhibit 7.1(K) (“Material Agreements”).  The Material Agreements are in full force and effect and Seller is not in default with respect to any of its material obligations thereunder.

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

(M) Gas Imbalances.  There are no gas imbalances with respect to the Assets as of the Effective Time.

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

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

(P) Calls on Production.  Except as set forth on Exhibit 7.1(P), there are no calls on production pertaining to the Assets that provide for payment at less than applicable current market prices.

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

7.2           Scope of Representations of Seller.

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

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

8.           REPRESENTATIONS AND WARRANTIES OF BUYER.

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

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

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

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

(D) Qualification and Bonding.  Buyer is, or will be on the Closing Date, in compliance with the bonding and liability insurance requirements of all applicable state or federal laws or regulations that could affect Buyer’s ability or authority to own and operate the Assets and is qualified to own any federal, Indian or state oil and gas leases that constitute part of the Assets.

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

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(F) Evaluation.  By reason of Buyer’s knowledge and experience in the evaluation, acquisition and operation of oil and gas properties, Buyer has evaluated the merits and risks of purchasing the Assets from Seller and has formed an opinion based solely upon Buyer’s knowledge and experience and not upon any representations or warranties by Seller.

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

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

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

9.1           Maintenance of Assets.  From the Effective Time until Closing, Seller agrees that it shall:

(A) Administer and operate the operated Assets in a good and workmanlike manner and in accordance with the applicable operating agreements.

(B) Not introduce any new methods of management, operation or accounting with respect to any or all of the Assets.

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

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

(E) Not voluntarily relinquish its position as operator to anyone other than Buyer with respect to any of the operated Assets or voluntarily abandon any of the Wells other than as required pursuant to the terms of a Lease or by regulation.

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(F) Not, without the prior written consent of Buyer (which consent shall not be unreasonably withheld, delayed or conditioned), (i) enter into any agreement or arrangement (other than one constituting a Permitted Encumbrance) transferring, selling or encumbering any of the Assets (other than in the ordinary course of business, including ordinary course sales of production, inventory or salvage); (ii) grant any preferential or other right to purchase or agree to require the consent of any party not otherwise required to consent to the transfer and assignment of the Assets to Buyer; (iii) enter into any new sales contracts, transportation contract or supply contracts which cannot be cancelled upon thirty (30) days or less prior notice; or (iv) incur or agree to incur any contractual obligation  (absolute or contingent) with respect to the Assets except as otherwise provided herein (including ordinary course sales of production, inventory or salvage or pursuant to any disclosed AFEs covering the Assets).

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

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

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

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

10.1           Plugging Obligation.  Upon consummation of the Closing, Buyer shall perform and assume all liability for the necessary and proper plugging and abandonment of all Wells and all surface restoration and reclamation required by law or the Leases, in each case to the extent the same relate to the Assets conveyed to Buyer.

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

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

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

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

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

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

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

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

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

13.           TERMINATION.

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

(A) At any time by mutual consent of the Parties.

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

(C) By Buyer if, on the Closing Date, any of the conditions set forth in Article 11 hereof shall not have been satisfied or waived; provided, however, that Seller shall have the right to satisfy such condition for a period of twenty (20) days following delivery of notice from Buyer regarding such failure.

(D) By Seller if, on the Closing Date, any of the conditions set forth in Article 12 hereof shall not have been satisfied or waived; provided, however, that with respect to any condition other than a material failure of Buyer to perform its obligations under Section 3.2, as to which the granting of any cure period shall be entirely within Seller’s sole and absolute discretion, Buyer shall have the right to satisfy such condition for a period of twenty (20) days following delivery of notice from Seller regarding such failure.

(E) By Seller or Buyer if Closing has not occurred on or before October 15, 2007.

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

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13.2           Effect of Termination.

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

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

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

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

14.           INDEMNIFICATION.

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

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

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

(C) OWNERSHIP AND OPERATION.  ALL LOSSES ARISING FROM SELLER’S OWNERSHIP OR OPERATION OF THE ASSETS PRIOR TO THE EFFECTIVE TIME DIRECTLY ASSOCIATED WITH THE FOLLOWING MATTERS, EXCLUDING ANY ONSITE ENVIRONMENTAL CLAIMS NOT RAISED BY BUYER PRIOR TO CLOSING:

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

(ii) THE VIOLATION BY SELLER OF THE TERMS OF ANY AGREEMENT BINDING UPON SELLER;

(iii) CLAIMS AGAINST SELLER BY CO-OWNERS, PARTNERS, JOINT VENTURERS AND OTHER PARTICIPANTS IN THE WELLS;

(iv) THE IMPROPER PAYMENT OF ROYALTIES, RENTALS AND SIMILAR PAYMENTS BY SELLER UNDER THE LEASES PRIOR TO THE EFFECTIVE TIME;

(v) THE LITIGATION MATTERS SET FORTH ON EXHIBIT 7.1(G);

(vi) AD VALOREM, PROPERTY, SEVERANCE AND SIMILAR TAXES ATTRIBUTABLE TO THE PERIOD OF TIME PRIOR TO THE EFFECTIVE TIME; AND

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

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

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

(1) With regard to a breach of representations and warranties contained in Sections 7.1(A), (B), (C) and (D), for four (4) year  period following the Closing;

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

(3) With regard to a breach of a covenant by Seller, for a period equal to the lesser of the applicable statute of limitations period or four (4) years following the Closing; and

(4) With regard to the matters covered by Section 14.1 (C), for a four (4) year period following the Closing.

(ii) Seller shall have no liability or obligation for any Losses, unless and until and only to the extent that the aggregate Losses for which Buyer is entitled to recover under this Agreement exceeds one percent (1%) of the Base Purchase Price (the “Indemnity Deductible”) (such amount being a deductible and not a threshold).

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

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

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

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

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

(C) ASSUMED LIABILITIES.  ALL LOSSES ARISING FROM OR COMPRISING THE ASSUMED LIABILITIES.

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

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

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15.           MISCELLANEOUS.

15.1           Casualty Loss.

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

(B) If, prior to the Closing, a Casualty occurs (or Casualties occur) which results in a reduction in the value of any of the Assets (“Casualty Loss”), (i) Seller shall retain such Asset and such Asset shall be the subject of an adjustment to the Base Purchase Price in the same manner set forth in Section 5.4 hereof, or (ii) at the Closing, Seller shall assign to Buyer the right to receive all insurance proceeds or other sums payable to Seller by reason of such Casualty Loss, the Base Purchase Price shall not be adjusted by reason of such payment, and Seller shall convey the affected Asset to Buyer.  In the event a Casualty Loss results in a five percent (5%) or greater reduction in the value of an affected Asset, Buyer shall have the right to exclude such Asset from the sale and receive a reduction of the Base Purchase Price based on the Allocated Value of such Asset.

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

15.2           Confidentiality.

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

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

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

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

SELLER:

The Operating Co., on behalf of all Sellers

1211 N. Price Rd.

Pampa, Texas 79065

Attn:                      Mr. David Smith

Tel:           (806) 669-1417

Fax:           (806) 665-5107

BUYER:

Legacy Reserves Operating LP

303 West Wall, Suite 1600

Midland, Texas 79701

Attn:                      Mr. Kyle A. McGraw

Tel:           (432) 682-2516

Fax:           (432) 684-3774

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

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

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

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

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

15.8           Fees, Expenses, Taxes and Recording.

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

(B) Buyer shall file all necessary Tax returns and other documentation with respect to all transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees, and, if required by applicable law, Seller shall join in the execution of any such Tax returns and other documentation.  Notwithstanding anything set forth in this Agreement to the contrary, Buyer shall pay any transfer, documentary, sales, use, stamp, registration and other similar Taxes and fees incurred in connection with this Agreement and the transactions contemplated hereby.  Buyer shall also pay any equipment lease transfer fees or other fees or expenses incurred in connection with transfer of the Assets to Buyer except as otherwise provided by this Agreement.

(C) Buyer shall, at its own cost, promptly record all instruments of conveyance and sale in the appropriate office of the state and county in which the lands covered by such instrument are located.  Buyer shall immediately file for and obtain the necessary approval of all federal, Indian, tribal or state government agencies to the assignment of the Assets.  The assignment of any state, federal or Indian tribal oil and gas leases shall be filed in the appropriate governmental offices on a form required and in compliance with the applicable rules of the applicable government agencies.  Buyer shall supply Seller with a true and accurate photocopy reflecting the recording information of all the recorded and filed assignments within a reasonable period of time after their recording and filing.  In the event that Seller undertakes to record and/or file the conveyance instruments and other documents associated with this transfer of interest, Buyer shall reimburse Seller for all associated fees at Post Closing.

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

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

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

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

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

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

15.15  Preferential Right to Purchase.  For a period beginning on the date of Closing, and continuing for a period of five (5) years, should Buyer desire to sell all or any part of its interests in the Assets purchased under this agreement, it shall promptly give written notice to David Smith, with full information concerning its proposed disposition, which shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase price, a legal description sufficient to identify the property, and all other terms of the offer.  David Smith shall have an optional prior right, for a period of twenty (20) days after the notice is delivered, to purchase for the stated consideration on the same terms and conditions the interest which Buyer proposes to sell.  However, there shall be no preferential right to purchase in those cases where Buyer wishes to mortgage its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests, or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which such party owns a majority of the stock.

Page 35

Executed as of the day and year first above written.

SELLER: The Operating Co.
By:	/s/ Alfred J. Smith
	Alfred J. Smith
	President

Nova Oil & Gas, Inc.
By:	/s/ Alfred J. Smith
	Alfred J. Smith
	President

X-Pert Corporation
By:	/s/ Alfred J. Smith
	Alfred J. Smith
	President

The 195 AF, Ltd. By: O&G Service Company, LLC, its general partner
By:	/s/ Alfred J. Smith
	Alfred J. Smith
	President

Cowboy Crude Oil & Gas, F.L.P. By: Six S Energy, Inc., its general partner
By:	/s/ David H. Smith
	David H. Smith
	President

Cottonhead, Ltd.
By:	/s/ J. D. Carr
	J. D. Carr
	General Partner

Page 36

BUYER: LEGACY RESERVES OPERATING LP By:  LEGACY RESERVES OPERATING GP LLC, ITS GENERAL PARTNER By:  LEGACY RESERVES LP, ITS SOLE MEMBER By:  LEGACY RESERVES GP, LLC, ITS GENERAL PARTNER
By:	/s/ Cary D. Brown
	Cary D. Brown
	Chairman and Chief Executive Officer

Page 37

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

     I, Cary D. Brown, certify that:

     1. I have reviewed this interim report on Form 10-Q of Legacy Reserves LP (the “registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

November 9, 2007	By:	/s/ Cary D. Brown
		Cary D. Brown
		Chief Executive Officer and Chairman of the Board of Legacy Reserves GP, LLC, general partner of Legacy Reserves LP (Principle Executive Officer)

EX-31.2

 Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

     I, Steven H. Pruett, certify that:

     1. I have reviewed this interim report on Form 10-Q of Legacy Reserves LP (the “registrant”);

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 9, 2007	By:	/s/ Steven H. Pruett
		Steven H. Pruett
		President, Chief Financial Officer and Secretary of Legacy Reserves GP, LLC, general partner of Legacy Reserves LP (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of Legacy Reserves LP (the “Partnership”) on Form 10-Q for the quarter ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, in his capacity as an officer of Legacy Reserves GP, LLC (the Company”), the general partner of the Partnership, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership.

/s/ Cary D. Brown	/s/ Steven H. Pruett
Cary D. Brown	Steven H. Pruett
Chief Executive Officer November 9, 2007	President, Chief Financial Officer and Secretary November 9, 2007

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be considered filed as part of the Report.