10KSB/A

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A


|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
      EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 2005

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
                          Commission File No. 0-10157

                               CAPCO ENERGY, INC.
        -----------------------------------------------------------------
        (Exact Name of Small Business Issuer as Specified in its Charter)

                 COLORADO                        84-0846529
   --------------------------------     ------------------------------------
   (State or other jurisdiction of     (I.R.S. Employer Identification No.)
   Incorporation or Organization)

                  5555 San Felipe, Suite 725, Houston, TX 77056
         ---------------------------------------------------------------
           (Address of Principal Executive Office, Including Zip Code)

        Registrant's telephone number including area code: (713) 622-5550

        Securities registered pursuant to Section 12(b) of the Act: None.

          Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.001 PAR VALUE
                          ----------------------------
                                 Title of Class

Indicate by check mark whether the Registrant (1) has filed all reports required
to have been filed by Section 13 or 15(d) of the Securities and 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. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation SB is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Yes |_|  No |X|

Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes |_| No |X|

State Issuer's revenues for its most recent fiscal year: $3,572,000.

As of June 30, 2006, 116,080,769 shares of Common Stock were outstanding. The
aggregate market value of the Common Stock of the Registrant held by
non-affiliates on that date was approximately $11.7 million.

Transitional small business disclosure format  Yes |_| No |X|





This Form 10-KSB/A is being filed to include Exhibits that were omitted from the
original filing of Form 10-KSB for the year ended December 31, 2005. The
Exhibits are listed in Item 13 (b) with the location reference of "filed
herewith electronically."




                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

GENERAL DEVELOPMENT OF BUSINESS

Capco Energy, Inc. ("Capco", the "Company", "we", "us", and "our"), with our
mailing address at 5555 San Felipe, Suite 725, Houston, TX 77056, was
incorporated as Alfa Resources, Inc. a Colorado corporation on January 6, 1981.
In November 1999, we changed our name to Capco. We were organized for the
purpose of engaging in oil and gas exploration, development and production
activities.

In November 2003, we purchased properties in the Brazos Field, offshore in
Matagorda County, Texas. We own a 65% working interest in a majority of the
property and we are the operator of the acquired property. The acquired
properties consist of 22 wells, four of which are currently in production.

In February 2004, we purchased a production platform with nine additional wells
in the Brazos Field, offshore in Matagorda County, Texas. We own a 90% working
interest in the wells and are the operator of the property.

In October 2004, we acquired a 45% working interest in two properties located in
Creek County, Oklahoma. The properties consisted of approximately 100 oil wells,
the majority of which were not in production at the time of acquisition by us.
In July 2005, we acquired an additional 5% working interest in the property.

In December 2004, we acquired a 100% working interest in an oil property
consisting of approximately 80 wells located in Osage County, Oklahoma.

In February 2005, we acquired producing properties in High Island Block 196,
which were to be assigned to a third party pending approval of that party as a
holder of Federal oil and gas leases by the Minerals Management Service.

In March 2005, we sold 30% of our working interest ownership in two producing
wells and one idle well in the Brazos Field.

On May 4, 2005, we closed on a Purchase and Sale Agreement and Management
Agreement ("Agreement") with Hoactzin Partners, L.P., ("Hoactzin"), an oil and
gas investment affiliate of New York based investment firm Dolphin Asset
Management Corp. We sold to Hoactzin the interests in High Island Block 196
which were acquired in February 2005, a portion of our interests in two
producing wells and one idle well in the Brazos Field in Texas state waters, and
a portion of our interest in the OCS Galveston Block 297 well on which drilling
operations were in progress at that date. The Agreement also included working
interests ranging from 14% to 100% in 11 producing wells situated on
approximately 13,300 gross acres located in St. Bernard Parish, Louisiana, and
Chandeleur Area, OCS Blocks 27, 29 and 30. The contract acquisition price of
$20.0 million, plus a production payment of $1.0 million, was reduced to a
closing cost of $12.1 million, after adjustment for net revenue credits for the
period from the effective date to the closing date and for a cash deposit of
$1.0 million paid by us. Hoactzin paid all of the funds required at closing,
except for $0.1 million that we paid. The production payment is to be paid from
25% of the revenue produced by the acquired property interests once payout of
the initial acquisition cost of $20.0 million has occurred.

Hoactzin had previously provided funding in the amount of $4.9 million for the
acquisition of the High Island Block 196 property. Included in that amount was
$2.0 million that was deposited with our surety company as collateral for bonds
that were posted with the Minerals Management Service. Hoactzin had also
advanced $1.5 million for the pending acquisition from us of working interests
in three wells in the Brazos Field and the well being drilling in the OCS
Galveston Block 297. We reported the total proceeds of $6.4 million as a note
payable for a portion of the year 2005 until Hoactzin received owner approval
from the Minerals Management Service, enabling us to assign the property
interests to Hoactzin.


                                       2


On November 30, 2005, Hoactzin closed on the acquisition of a producing oil
property located in Orange County, Texas. Hoactzin funded the total acquisition
cost of $2.6 million. The acquired property consists of approximately 550 acres
and includes 130 previously drilled wells, of which 20 were in current
production. As operator of the property, Capco intends to begin a program to
return idle wells to production.

The Agreement is governed under the terms of a Management Agreement between the
parties. Hoactzin owns title to the properties and retains all cash flow from
the properties until their investment, including a return of 8% on the invested
funds, is repaid ("Repayment Date"), at which time we will receive a management
fee equal to 66.7% of the net cash flow from the properties. We have the option
to purchase the property interests from Hoactzin at any time after the one-year
anniversary of the Repayment Date, and Hoactzin has the option to sell its
property interests to us at any time after the two-year anniversary of the
Repayment Date. The option prices are based on formulas specified in the
Management Agreement.

As of December 31, 2005, Hoactzin had expended a total of $21.2 million under
this Agreement. Interest earned on invested funds totaled $0.8 million, and
distributions of net cash flow to Hoactzin amounted to $11.4 million, resulting
in a remaining investment balance of $10.6 million.

In connection with the acquisition of the Chandeleur Area properties, we secured
participation from two outside investors. We used the proceeds from these
investors, in the total amount of $0.7 million, to fund a portion of the $1.1
million that we contributed to the total acquisition cost of these properties.
The proceeds were recorded as a reduction of our basis in the Agreement. For the
consideration paid to us, the investors received a total of 5.5% of our rights
and title to the Chandeleur Area properties. For an initial period of twelve
months, beginning July 1, 2005, the investors are receiving distributions at the
rate of $66,000 per month. At the end of that period, the investors' accounts
will be adjusted to reflect any difference between the cash distributions paid
during the period and actual cash flow from the properties attributable to the
5.5% interest, with a settlement of funds either due to, or from, the investors.
In addition, effective July 1, 2006, the investors will begin to receive
payments equal to 5.5% of actual net cash flow from the Chandeleur Area
properties.

At the closing of the Agreement with Hoactzin, we issued a series of common
stock purchase warrants ("Warrants") to Hoactzin. The Warrants are exercisable
into a total of 24,226,181 shares of the Company's Common Stock at initial
exercise prices ranging from $0.176 to $0.30, subject to adjustments pursuant to
the anti-dilution provisions set forth in the Warrants, and expire five (5)
years from date of issue. The Warrants may be exercised upon payment of cash,
exchanged for our Common Stock, or applied as a credit against the Aggregate
Investment Amount ("AIA"), as that term is defined in the agreements. Using the
Black-Scholes pricing model with a Common Stock price of $0.50, which was the
closing price on the grant date of the Warrants, it was determined that the
Warrants had a fair value of $10.8 million. This amount has been accounted for
as Cost of Financing Under Management Agreement for obtaining the management fee
as provided for in the Management Agreement, with a corresponding increase to
our paid in capital account. The $2.0 million cash deposit with our surety
company was allocated from this amount to be reported with other similar cash
deposits. Cash payments in the total amount of $1.1 million that we contributed
to the Agreement in connection with the acquisition of the Chandeleur Area
properties have also been accounted for as Cost of Financing Under Management
Agreement.


                                       3


During the eight-month period from closing of the Agreement in May 2005 to
December 31, 2005, Hoactzin expended an additional $2.9 million principally in
connection with an acquisition of a producing oil field in southeast Texas. This
expenditure resulted in grants of 5,248,196 Warrants with a calculated fair
value, using the Black Scholes pricing model, of $0.9 million. This amount has
been accounted for as Cost of Financing Under Management Agreement, with a
corresponding increase to our paid in capital account. Hoactzin expended an
additional $1.9 million in connection with the re-financing of a former
subsidiary's indebtedness for which we were providing a continuing guaranty. The
re-financing resulted in our removal as a guarantor of the indebtedness.
Warrants in the amount of 1.9 million with a calculated fair value of $0.3
million, using the Black Scholes pricing model, were granted to Hoactzin as a
result of this expenditure. We have charged this cost to operations with a
corresponding increase to our paid in capital account. All of the Warrants
issued during this period have an exercise price of $0.195, and expire five (5)
years from date of issue.

Effective October 1, 2005, we executed a Funding Agreement ("Agreement") with
Domain Development Partners I, LP ("Domain"), providing for the development of
idle wells in our Brazos area in offshore Matagorda County, Texas. Under the
terms of the Agreement, Domain would provide funding to pay for our portion of
costs to rework as many as fifteen idle wells in an attempt to restore the wells
to production. Domain's only recourse for repayment of the funds expended is the
revenue that results from such rework activities. Domain will receive 70% of our
revenue interest in the wells until such time that it has received reimbursement
for 150% of its expended cost, at which time Domain's interest in our revenue
will decrease to 35%. Following recovery of 200% of its expended cost, Domain
will cease to have an interest in the wells. In connection with this transaction
we issued warrants to Domain to acquire, for a period of two years, up to five
million shares of Common Stock at a price of $0.175 per share. Using the
Black-Scholes method of valuation, the warrants were determined to have a fair
value of $0.4 million, which cost has been included in our full cost pool with a
corresponding credit to paid in capital. As of December 31, 2005, rework
activities had commenced on two wells at a cost of approximately $0.2 million.
Domain had advanced funds in the amount of $0.2 million to pay such costs.
Domain has been provided with a security agreement covering the wells for which
it will be providing funding.

NARRATIVE DESCRIPTION OF BUSINESS

GENERAL

We are an independent energy company engaged primarily in the acquisition,
exploration, development, production for and sale of oil, gas and natural gas
liquids.

OIL AND GAS PRODUCTION

Property Acquisitions and Sales during 2004 and 2005

In February 2004, we purchased a production platform with nine additional wells
in the Brazos Field, offshore in Matagorda County, Texas. We own a 90% working
interest in the wells and will be operator of the property. In conjunction with
the acquisition, we plan to acquire leases for the mineral interests at an
estimated cost of $0.1 million. Such expenditure is necessary before we can
initiate production from any of the acquired wells. Under the terms of the
agreement, the seller agreed to contribute as much as $1.0 million to apply
toward payment of abandonment costs when, and if, we incur such costs.

In February 2004, we drilled a coal bed methane well in Stephens County, Texas.
The well was drilled to a depth of 1,100 feet at a cost of $0.1 million, and
following a period of "dewatering" and evaluation was determined to be
non-productive. By drilling the well we earned the right to negotiate the
purchase of a leasehold interest in approximately 4,000 acres, along with wells
previously drilled on the property.


                                       4


Effective July 1, 2004, we acquired a 92.8% working interest in this 4,000 acre
property in Stephens County, Texas. In addition to the acreage, the acquisition
included one producing gas well drilled by the former owners, the coal bed
methane well drilled by us during the year and seismic and geological studies.
We issued 3.6 million shares of Common Stock as consideration valued at $0.4
million. The per share price of $0.16 approximated the market price of our
Common Stock at that time. Approximately 70% of the acquired working interest in
the property was acquired as a result of our exchange of shares for 100% equity
ownership of Packard Gas Company with individuals, or entities controlled by
individuals, who have either a direct, or beneficial, relationship to us,
including our President. The negotiated acquisition price was determined in
amounts prorated to all members of the selling group. Subsequent to the exercise
of our option, we drilled and completed a gas well on the property at a cost of
$0.2 million. Following a period of evaluation of the two producing gas wells
the decision was made to discontinue further drilling activities on the
property, and as a result, we only earned acreage attributable to each well
location actually drilled on the property. In July 2004, we participated with a
15% working interest in the acquisition of leases covering approximately 7,000
gross acres in a drilling prospect located in Fayette County, Alabama. Two wells
were drilled on the property and both were determined to be incapable of
commercial production. We plan to further evaluate the undeveloped acreage to
determine if additional drilling is warranted. We incurred expenditures for
lease acquisition and drilling costs in the total amount of $0.2 million for our
15% participation.

In September 2004, our 80%-owned subsidiary, Bison Energy Company, acquired a
33.33% working interest in an oil property located in Natrona County, Wyoming at
a cost of $30,000. The property consisted of 720 gross acres and included nine
wells, four of which were in production. We sold our interest in Bison Energy
Company in April 2005, at a price equal to our original investment.

Effective September 30, 2004, we sold our interests in non-operated producing
properties located in Alabama and Louisiana to a company owned by our Chief
Executive Officer. Sales proceeds in the amount of $0.4 million were received by
us in October 2004 and were used for working capital. The sales proceeds were
credited against our basis in oil and gas properties. No gain or loss was
recognized from the sale as the disposition represented only 3% of our proved
reserves at the time of sale. If it is determined through due diligence by us
that the properties could have been sold for an amount greater than $0.4
million, then the related party has the obligation to pay such excess to us, or
we, at our option, may repurchase the properties at the original sales price. No
adjustment was made in 2005 to the transaction as originally recorded.

In October 2004, we acquired a 45% working interest in two properties located in
Creek County, Oklahoma. The properties consisted of approximately 100 oil wells,
the majority of which were not in production at the time of acquisition by us.
Under the terms of the purchase agreement we are obligated to expend a total of
$0.6 million over a specified period of time in an effort to bring injection and
production wells back in to service to earn the entire 45% interest. In mid-year
2005, we acquired an additional 5% working interest from another joint interest
owner, increasing our working interest to 50%. As of December 31, 2005, we had
expended an amount in excess of the $0.6 million development obligation to earn
our entire working interest position.

In December 2004, we acquired a 100% working interest in an oil property
consisting of approximately 80 wells located in Osage County, Oklahoma. The
acquisition cost of $0.2 million was to be settled by the issuance of 1.0
million shares of our Common Stock. The per share price of $0.20 approximated
the market price of our Common Stock at the time the agreement was negotiated
with the seller. The Common Stock was issued in March 2005. The seller of the
property retained a net profits interest in the amount of $0.3 million that is
to be paid from one-third of the net production from the property until paid in
full. A total of $14,000 was paid against this obligation during the year 2005.
The net profit distributions will be included with the acquisition cost of the
property as we pay them. In addition, the purchase agreement stipulated that we
expend a minimum of $0.1 million of property development costs within one year
from the date of acquisition. Such costs were expended during the year 2005.


                                       5


On December 31, 2004, we sold our interests in non-operated producing properties
located in Michigan and Montana and other assets to our Chief Executive Officer
for $4.7 million. We received a fairness opinion for the sale in January 2005.
The sales amount was settled by the payment of a cash deposit in the amount of
$0.7 million, assumption of debt against the properties in the amount $3.3
million and the issuance of a note payable to us in the amount of $0.7 million.
The note was paid in full in March 2005. The disposition resulted in a
significant change to the depletion rate in our full cost pool cost center,
which required that gain or loss recognition be given to the sale. We recorded a
gain in the amount of $0.4 million from the sale.

In February 2005, we commenced drilling operations on an exploratory well in
Outer Continental Shelf ("OCS") Galveston Block 297. Capco was the operator of
the well, which was targeted for a total depth of 13,500 feet. If successful we
would own a 27% working interest in the well, with the remaining interest owned
by other oil and gas companies. Drilling activities were significantly extended
past the anticipated timeline as it became necessary to sidetrack and re-drill a
portion of the well due to encountering excessive gas pressures at a depth of
approximately 13,350 feet. The well was drilled to its target depth and tested
for the presence of hydrocarbons, but in the opinion of management and the other
participants, the test results did not warrant a completion attempt, and the
well was plugged and abandoned in May 2005. We filed a claim with our insurance
company for recovery of a portion of the additional costs incurred during the
drilling of the well, and received $3.2 million for our interest in November
2005. Our cost of drilling the well, after reduction for insurance proceeds and
turnkey payments received from some of the participants in the well, was $2.8
million.

In March 2005 we received proceeds of $0.5 million for the sale of a portion of
our working interest ownership in two producing wells and one idle well in the
Brazos Field.

On May 4, 2005, we closed on a Purchase and Sale Agreement and Management
Agreement ("Agreement") with Hoactzin Partners, L.P., ("Hoactzin"), an oil and
gas investment affiliate of New York based investment firm Dolphin Asset
Management Corp. We sold to Hoactzin the interests in High Island Block 196
which were acquired in February 2005, a portion of our interests in two
producing wells and one idle well in the Brazos Field in Texas state waters, and
a portion of our interest in the OCS Galveston Block 297 well on which drilling
operations were in progress at that date. The Agreement also included working
interests ranging from 14% to 100% in 11 producing wells situated on
approximately 13,300 gross acres located in St. Bernard Parish, Louisiana, and
Chandeleur Area, OCS Blocks 27, 29 and 30. The contract acquisition price of
$20.0 million, plus a production payment of $1.0 million, was reduced to a
closing cost of $12.1 million, after adjustment for net revenue credits for the
period from the effective date to the closing date and for a cash deposit of
$1.0 million paid by us. Hoactzin paid all of the funds required at closing,
except for $0.1 million that we paid. The production payment is to be paid from
25% of the revenue produced by the acquired property interests once payout of
the initial acquisition cost of $20.0 million has occurred.

Hoactzin had previously provided funding in the amount of $4.9 million for the
acquisition of the High Island Block 196 property. Included in that amount was
$2.0 million that was deposited with our surety company as collateral for bonds
that were posted with the Minerals Management Service. Hoactzin had also
advanced $1.5 million for the pending acquisition from us of working interests
in three wells in the Brazos Field and the well being drilling in the OCS
Galveston Block 297. We reported the total proceeds of $6.4 million as a note
payable for a portion of the year 2005 until Hoactzin received owner approval
from the Minerals Management Service, enabling us to assign the property
interests to Hoactzin.


                                       6


On November 30, 2005, Hoactzin closed on the acquisition of a producing oil
property located in Orange County, Texas. Hoactzin funded the total acquisition
cost of $2.6 million. The acquired property consists of approximately 550 acres
and includes 130 previously drilled wells, of which 20 were in current
production. As operator of the property, Capco intends to begin a program to
return idle wells to production.

The Agreement is governed under the terms of a Management Agreement between the
parties. Hoactzin owns title to the properties and retains all cash flow from
the properties until their investment, including a return of 8% on the invested
funds, is repaid ("Repayment Date"), at which time we will receive a management
fee equal to 66.7% of the net cash flow from the properties. We have the option
to purchase the property interests from Hoactzin at any time after the one-year
anniversary of the Repayment Date, and Hoactzin has the option to sell its
property interests to us at any time after the two-year anniversary of the
Repayment Date. The option prices are based on formulas specified in the
Management Agreement.

As of December 31, 2005, Hoactzin had expended a total of $21.2 million under
this Agreement. Interest earned on invested funds totaled $0.8 million, and
distributions of net cash flow to Hoactzin amounted to $11.4 million, resulting
in a remaining investment balance of $10.6 million.

In connection with the acquisition of the Chandeleur Area properties, we secured
participation from two outside investors. We used the proceeds from these
investors, in the total amount of $0.7 million, to fund a portion of the $1.1
million that we contributed to the total acquisition cost of these properties.
The proceeds were recorded as a reduction of our basis in the Agreement. For the
consideration paid to us, the investors received a total of 5.5% of our rights
and title to the Chandeleur Area properties. For an initial period of twelve
months, beginning July 1, 2005, the investors are receiving distributions at the
rate of $66,000 per month. At the end of that period, the investors' accounts
will be adjusted to reflect any difference between the cash distributions paid
during the period and actual cash flow from the properties attributable to the
5.5% interest, with a settlement of funds either due to, or from, the investors.
In addition, effective July 1, 2006, the investors will begin to receive
payments equal to 5.5% of actual net cash flow from the Chandeleur Area
properties.

At the closing of the Agreement with Hoactzin, we issued a series of common
stock purchase warrants ("Warrants") to Hoactzin. The Warrants are exercisable
into a total of 24,226,181 shares of the Company's Common Stock at initial
exercise prices ranging from $0.176 to $0.30, subject to adjustments pursuant to
the anti-dilution provisions set forth in the Warrants, and expire five (5)
years from date of issue. The Warrants may be exercised upon payment of cash,
exchanged for our Common Stock, or applied as a credit against the Aggregate
Investment Amount ("AIA"), as that term is defined in the agreements. Using the
Black-Scholes pricing model with a Common Stock price of $0.50, which was the
closing price on the grant date of the Warrants, it was determined that the
Warrants had a fair value of $10.8 million. This amount has been accounted for
as Cost of Financing Under Management Agreement for obtaining the management fee
as provided for in the Management Agreement, with a corresponding increase to
our paid in capital account. The $2.0 million cash deposit with our surety
company was allocated from this amount to be reported with other similar cash
deposits. Cash payments in the total amount of $1.1 million that we contributed
to the Agreement in connection with the acquisition of the Chandeleur Area
properties have also been accounted for as Cost of Financing Under Management
Agreement.

During the eight-month period from closing of the Agreement in May 2005 to
December 31, 2005, Hoactzin expended an additional $2.9 million principally in
connection with an acquisition of a producing oil field in southeast Texas. This
expenditure resulted in grants of 5,248,196 Warrants with a calculated fair
value, using the Black Scholes pricing model, of $0.9 million. This amount has
been accounted for as Cost of Financing Under Management Agreement, with a
corresponding increase to our paid in capital account.


                                       7


Effective October 1, 2005, we executed a Funding Agreement ("Agreement") with
Domain Development Partners I, LP ("Domain"), providing for the development of
idle wells in our Brazos area in offshore Matagorda County, Texas. Under the
terms of the Agreement, Domain would provide funding to pay for our portion of
costs to rework as many as fifteen idle wells in an attempt to restore the wells
to production. Domain's only recourse for repayment of the funds expended is the
revenue that results from such rework activities. Domain will receive 70% of our
revenue interest in the wells until such time that it has received reimbursement
for 150% of its expended cost, at which time Domain's interest in our revenue
will decrease to 35%. Following recovery of 200% of its expended cost, Domain
will cease to have an interest in the wells. In connection with this transaction
we issued warrants to Domain to acquire, for a period of two years, up to five
million shares of Common Stock at a price of $0.175 per share. Using the
Black-Scholes method of valuation, the warrants were determined to have a fair
value of $0.5 million, which cost has been included in our full cost pool with a
corresponding credit to paid in capital. As of December 31, 2005, rework
activities had commenced on two wells at a cost of approximately $0.2 million.
Domain had advanced funds in the amount of $0.2 million to pay such costs.
Domain has been provided with a security agreement covering the wells for which
it will be providing funding.

Equipment, Products and Raw Materials

We own no drilling rigs, but we do own two pulling units, which may be used for
work-over activities on our operated wells. In addition, we own two crew vessels
which are used to transport personnel and material to our properties located in
the Texas Gulf Coast, and one lift boat which is used in connection with
remediation activities at our production facilities in the Texas Gulf Coast.
Effective June 30, 2006, we sold our equity ownership in our marine vessels,
however, we have retained a first call on the availability of the vessels in
order to provide timely service to our offshore properties.

Our principal products are crude oil and natural gas. Crude oil and natural gas
are sold to various purchasers including pipeline companies, which service the
areas in which our producing wells are located. Our business is seasonal in
nature, to the extent that weather conditions at certain times of the year may
affect our access to oil and gas properties and the demand for natural gas.
Principally all of our oil and gas production is sold on a month-to-month basis
with no firm sales contracts.

The existence of commercial oil and gas reserves is essential to the ultimate
realization of value from properties, and thus may be considered a raw material
essential to our business.

The acquisition, exploration, development, production and sale of oil and gas
are subject to many factors, which are outside our control. These factors
include national and international economic conditions, availability of drilling
rigs, casing, pipe and other fuels, and the regulation of prices, production,
transportation, and marketing by federal and state governmental authorities.

We acquire oil and gas properties from landowners, other owners of interests in
such properties, or governmental entities. For information on specific our
properties see Item 2. We currently are not experiencing any difficulty in
acquiring necessary supplies or services as long as we can pay for the services
and supplies nor are we experiencing any difficulty selling our products.

Competition

The oil and gas business is highly competitive. Our competitors include major
companies, independents and individual producers and operators. Many of our
numerous competitors throughout the country are larger and have substantially
greater financial resources than us. Oil and gas, as a source of energy, must
compete with other sources of energy such as coal, nuclear power, synthetic
fuels and other forms of alternate energy. Domestic oil and gas must also
compete with foreign sources of oil and gas, the supply and availability of
which have at times depressed domestic prices. We have an insignificant
competitive position in the oil and gas industry.


                                       8


Governmental and Environmental Laws

Our activities are subject to extensive federal, state and local laws and
regulations controlling not only the exploration for oil and gas, but also the
possible effect of such activities upon the environment. Existing as well as
future legislation and regulations could cause additional expense, capital
expenditures, restrictions and delays in the development of properties, the
extent of which cannot be predicted. Many states have been authorized by the
Environmental Protection Agency to enforce regulations promulgated under various
federal statutes. In addition, there are numerous other state as well as local
authorities that regulate the environment, some of which impose more stringent
environmental standards than Federal laws and regulations. The penalties for
violations of state laws vary but typically include injunctive relief, recovery
of damages for injury to air, water or property, and fines for non-compliance.
Since inception, we have not made any material expenditure for environmental
control facilities and do not expect to make any material expenditure during the
current and following fiscal year.

Insurance

We have a commercial general liability policy, as well as other policies
covering damage to our properties. These policies cover our facilities in all
states of operation. The exploration for, and production of, oil and gas can be
hazardous, including unforeseen events such as blowouts, cratering of surface
locations, hurricanes, fires and loss of well control. Events such as these can
result in damage to wells and production facilities, injury to persons, loss of
life and damage to the environment. While management believes our insurance
coverage is adequate for most foreseeable problems, and is comparable with the
coverage of other companies in the same business and of similar size, our
coverage does not protect us against all operational risks or for most third
party liabilities relating to damage of the environment. Such environmental
related coverage to third parties is generally unavailable or available only at
a prohibitive cost.

Employees

We employ approximately 38 people, none of whom are represented by any
collective bargaining organizations. Management considers our employee relations
to be satisfactory at the present time.

ITEM 2.   DESCRIPTION OF PROPERTIES.

OIL AND GAS PROPERTIES. Our principal oil and gas properties during the year
ended December 31, 2005, were located in Oklahoma, Texas and the Texas Gulf
Coast.

Oklahoma We own working interests in oil and gas properties located in Creek,
Osage and Payne Counties, Oklahoma, for the year 2006, we plan to continue
development activities on the properties located in Oklahoma to return inactive
wells to service. We will assess other shut-in wells on these properties
throughout the year in an effort to identify additional re-work locations.
During the year 2005 we earned a 75% working interest in a property comprised of
80 gross acres located in Payne County, Oklahoma.


                                       9


Texas We own working interests in oil and gas properties located in Stephens and
Galveston Counties, Texas and conducted work over operations on some of the
Galveston County wells in an attempt to increase production from the property.
Subsequent to the end of year 2005, our interests in three wells in the Stephens
County property that were shut-in as of the end of the year 2005 were conveyed
to a third party to serve as operator and assume future plugging and abandonment
obligations.

Texas Gulf Coast We own working interests ranging from 35% to 100% in thirty-six
(36) wells located in offshore Matagorda County in the Texas Gulf Coast.
Effective October 1, 2005, we executed a Funding Agreement ("Agreement") with
Domain Development Partners I, LP ("Domain"), providing for the development of
idle wells in our Brazos area. Under the terms of the Agreement, Domain would
provide funding to pay for our portion of costs to rework as many as fifteen
idle wells in an attempt to restore the wells to production. Domain's only
recourse for repayment of the funds expended is the revenue that results from
such rework activities. Domain will receive 70% of our revenue interest in the
wells until such time that it has received reimbursement for 150% of its
expended cost, at which time Domain's interest in our revenue will decrease to
35%. Following recovery of 200% of its expended cost, Domain will cease to have
an interest in the wells. As of December 31, 2005, rework activities had
commenced on two wells at a cost of approximately $0.2 million. Domain had
advanced funds in the amount of $0.2 million to pay such costs. In connection
with this transaction we issued warrants to Domain to acquire, for a period of
two years, up to five million shares of Common Stock at a price of $0.175 per
share. Domain has been provided with a security agreement covering the wells for
which it has provided funding.

Other Effective September 30, 2004, we sold our working interest ownership in
non-operated properties located in the states of Alabama and Louisiana During
the year 2004, we participated in the leasing of more than 7,000 gross acres and
the drilling of two exploratory wells on a prospect in Fayette County, Alabama.
Although both wells were determined to be non-productive, we do not consider the
entire acreage block condemned at this time. We plan further evaluation of the
remaining acreage under lease during the year to determine if additional
drilling is warranted.

OIL AND GAS ACREAGE. We hold interests in oil and gas leaseholds as of December
31, 2005, as follows:

                       Developed             Undeveloped          Expiration
                       Properties            Properties            Date (1)
                     -------------         ---------------         ----------
                    Gross      Net        Gross        Net
 State              Acres     Acres       Acres       Acres
 -----              -----     -----       -----       -----
Alabama                --        --       6,409         961      Nov `06-Mar `07
Mississippi           200        25          --          --
Oklahoma            4,140     2,655          80          60      Mar `06
Texas              13,250     8,598          --          --

     Total         17,590    11,278       6,489       1,021

Net acres represent the gross acres in a lease or leases multiplied by our
working interest in such lease or leases.

(1) Expiration date(s) of leases for undeveloped properties. Leasehold interests
for developed properties are held by production.

PROVED DEVELOPED AND PROVED UNDEVELOPED RESERVES. The following table sets forth
the proved developed and proved undeveloped oil or gas reserves accumulated by
us, for the years ended December 31, 2005, 2004 and 2003. The reserves are based
on engineering reports prepared by our independent engineers: Ryder Scott
Company in 2005; Pressler Petroleum Consultants, Inc. in 2004; and Burroughs
Engineering Services and Netherland, Sewell & Associates, Inc. in 2003. All of
such reserves are located in the United States of America. For the year ended
December 31, 2003, we also owned producing oil and gas property located in the
province of Alberta, Canada, but the operations were minimal and estimates of
proved reserves were not prepared at each year-end. In 2003, we sold the
Canadian interests.


                                       10


                           2005                 2004                 2003
                     -----------------   -----------------    -----------------
                       Oil      Gas        Oil      Gas         Oil       Gas
                      (Bbls)   (MCF)      (Bbls)   (MCF)       (Bbls)    (MCF)
Proved Developed
 Reserves            95,715  4,865,897   307,818  1,458,287   351,194 15,507,081

Proved Undeveloped
 Reserves            42,750         --    78,862  1,657,984   210,021  2,107,182
                    ------- ----------   -------  ---------   -------  ---------
Proved
 Reserves           138,465  4,865,897   386,680  3,116,271   561,215 17,614,263
                    ======= ==========   =======  =========   =======  =========

Our proved reserves at December 31, 2005 changed significantly from the reported
quantities at December 31, 2004. Our oil reserves decreased 277,000 barrels due
to revisions of previous estimates by our independent engineers. Based primarily
on operating performance during the year 2005, the estimates of remaining proved
oil reserves for our SUDS West property in Creek County, Oklahoma, and our
Caplen Field in Galveston County, Texas were revised downward by 221,500 and
105,500 barrels of oil, respectively. The estimate of remaining proved oil
reserves for our Bandwheel property in Osage County, Oklahoma was increased by
46,400 barrels of oil. Revisions of estimates of remaining proved gas reserves
accounted for an increase of 2.5 mmcf of gas, all of which was attributable to
our Brazos property located in offshore Matagorda County, Texas. Based on
current year production and the initial results of the rework program which
began in the fourth quarter of year 2005, including extensive geological study
and log analysis, the independent engineers determined that the estimate of
remaining proved gas reserves had increased from the end of the prior year.

We had a significant decline in reserves in 2004 attributable to our producing
properties located in onshore and offshore Texas. Downward revisions to the
Caplen Field located in Galveston County, Texas totaled 151,427 barrels of oil
and 240,085 mcf of gas. Production in the year 2004 was significantly curtailed
due to field operational problems. Wells, which were shut-in for an extended
period during the year 2004, and remained shut-in at year-end, were reclassified
to proved developed non-producing status. Proved developed gas reserves
decreased from 317,506 mcf to 33,336 mcf. Approximately 55% of the decrease was
due to the elimination of one well as it was determined during the year 2004
that the reservoir was depleted. Proved undeveloped oil reserves decreased from
210,021 barrels to 78,862 barrels due to the elimination of one location and per
well reductions based on the incumbent engineer's evaluation of the locations.
Proved reserves attributed to the Brazos Field located in offshore Matagorda
County, Texas were revised downward in the amounts of 50,877 barrels of oil and
7,351,615 mcf of gas. Work-over activities were conducted on five wells during
the year in an attempt to either increase production rates or restore wells to
service. Such activities were successful on only one well. As a result the
incumbent engineer significantly reduced the previously reported proved reserves
until such time that it can be demonstrated that the wells are capable of
producing at economical levels. The changes reflect the engineers' subjective
evaluation of the properties based on a number of factors including data that
was available when the evaluation was prepared, actual production during the
current year and price changes. Properties sold by us during the year 2004
resulted in additional decreases of 190,400 barrels of oil and 6,262,000 mcf of
gas. Properties acquired during the year 2004 resulted in an increase to proved
reserves of 240,200 barrels of oil and 83,000 mcf of gas, while year 2004
production resulted in a decrease of proved reserves of 22,100 barrels of oil
and 727,000 mcf of gas.


                                       11


Proved reserves are estimates of oil and gas to be produced in the future. There
are numerous uncertainties inherent in the process of preparing such estimates,
including future rates of production, timing and cost of development
expenditures and the actual results realized as a result of such expenditures.
The estimates presented in this Report are based on several assumptions
including constant oil and gas prices, operating expenses and capital
expenditures. Actual future production, cash flow and ultimate recoverable
quantities of oil and gas may vary significantly from the estimated quantities,
as variances from the assumptions could result in significant differences in
quantities and value.

No major discovery or other favorable or adverse event has occurred since
December 31, 2005, which is believed to have caused a material change in our
proved reserves.

RESERVES REPORTED TO OTHER AGENCIES. There have been no reserve estimates filed
with any other United States federal authority or agency.

NET OIL AND GAS PRODUCTION. The following table sets forth the net quantities of
oil (including condensate and natural gas liquids) and gas produced during the
years ended December 31, 2005, 2004 and 2003:

                                      2005           2004             2003
                                    --------       --------         --------
      Oil (Bbls):
        United States                12,620         22,087            38,613
        Canada                           --             --                --
      Gas (Mcf):
        United States               293,199        727,336           408,747
        Canada                           --             --             7,584

The following table sets forth the average sales price and production cost per
units of production for the years ended December 31, 2005, 2004 and 2003:

                                      2005           2004             2003
                                    --------       --------         --------
     Average Sales Price:
         United States:
            Bbl                      $54.59          $37.13           $21.69
            Mcf                      $ 6.67          $ 5.54           $ 4.92
         Canada-Mcf                  $   --              --           $ 1.78

     Average Production (Lifting)
      Costs: Per Equivalent
      Barrel of Oil:
          United States              $30.49           $17.87          $14.25
          Canada                     $   --               --          $ 7.01

During the periods covered by the foregoing tables, we were not a party to any
long-term supply or similar agreements with foreign governments or authorities
in which we acted as a producer.

PRODUCTIVE WELLS (1). The following table sets forth our total gross and net
productive oil and gas wells as of December 31, 2005:


                                       12


                            OIL                          GAS
                   ---------------------        --------------------
 State             Gross(2)       Net(3)        Gross(2)      Net(3)
 -----             --------       ------        --------      ------
Oklahoma              91           60.7               --          --
Texas                  2            1.2                6         3.2
                     ---          -----         --------      ------
     Total            93           61.9                6         3.2
                     ---          -----         --------      ------

(1) Productive wells are producing wells and wells capable of production
including wells that are shut in.

(2) A gross well is a well in which a working interest is owned. The number of
wells is the total number of wells in which a working interest is owned.

(3) A net well is deemed to exist when the sum of fractional ownership working
interests owned in gross wells equals one. The number of net wells is the sum of
the fractional ownership working interests owned in gross wells expressed in
whole numbers and fractions thereof.

UNDEVELOPED PROPERTIES. During the year ended December 31, 2005, we acquired a
75% working interest in 80 gross (60 net) acres of undeveloped property in Payne
County, Oklahoma.

During the year ended December 31, 2004, we acquired a 15% working interest in
approximately 7,049 gross (1,057 net) acres of undeveloped property in Fayette
County, Alabama. Two dry holes were drilled on the property, resulting in the
condemnation of 640 gross acres. The remaining acreage (6,409 gross) is under
evaluation by us to determine if additional drilling is warranted. Leases on the
property expire at various times during the period November 2006 to March 2007.
We did not conduct any drilling activities on the property during year 2005.

Our oil and gas properties are in the form of mineral leases. As is customary in
the oil and gas industry, a preliminary investigation of title is made at the
time of acquisition of undeveloped properties. Title investigations are
generally completed, however, before commencement of drilling operations.

We believe that our methods of investigating are consistent with practices
customary in the industry and that it has generally satisfactory title to the
leases covering our proved reserves.

DRILLING ACTIVITY. The following table sets forth certain information for the
years ended December 31, 2005 and 2004, pertaining to our participation in the
drilling of exploratory and development wells:

                                        2005                       2004
                                    ------------               ------------
                                 Gross(1)     Net(2)        Gross(1)     Net(2)
                                 -------      -----         -------      -----
     Exploratory
        Oil                         --          --             --         --
        Gas                         --          --              1        0.9
        Dry(3)                       1         0.3              3        1.2
     Development
        Oil                         --          --             --         --
        Gas                         --          --             --         --
        Dry(3)                      --          --             --         --
     Total
        Oil                         --          --             --         --
        Gas                         --          --              1        0.9
        Dry(3)                       1         0.3              3        1.2

(1) A gross well is a well in which a working interest is owned. The number of
wells is the total number of wells in which a working interest is owned.

(2) A net well is deemed to exist when the sum of fractional ownership working
interests owned in gross wells equals one. The number of net wells is the sum of
the fractional ownership working interests owned in gross wells expressed in
whole numbers and fractions thereof.


                                       13


(3) A dry hole is an exploratory or development well that is not a producing
well.

All of our drilling activities were conducted in the United States of America.

We did not conduct any drilling activities during the year ended December 31,
2003.

DELIVERY COMMITMENTS. We are not obligated to provide a fixed and determinable
quantity of oil and gas in the future pursuant to existing contracts or
agreements.

OFFICE FACILITIES. We lease space for our executive offices at 5555 San Felipe,
Suite 725, Houston, TX, and lease additional office space at locations in
Tustin, CA and Tulsa, OK. Total leased space is approximately 6,300 square feet
at the rate of $7,300 per month.

ITEM 3.  LEGAL PROCEEDINGS.

We are a party to certain litigation that has arisen in the normal course of our
business and that of our subsidiaries. A company engaged by us to provide well
service in connection with work-over operations on some of our offshore wells
has filed a claim for unpaid invoices in the amount of approximately $0.2
million. We have recorded less than $50,000 of such costs in our accounts, and
have claims against the service company for damages and costs to our wells in an
estimated amount in excess of $1.0 million. We expect to show that our damages
far exceed the claim amount asserted by the service company. No trial date has
yet been set for this matter.

In a matter styled Harvest Oil & Gas, LLC v Capco Energy, Inc. filed in United
States District Court, Eastern District of Louisiana on August 16, 2005, the
claimant seeks collection of a $0.6 million finders fee on a transaction where
title to oil and gas properties was initially taken by Capco, but then
immediately transferred to the Hoactzin Agreement. The Company previously
submitted an offer to settle in the amount of $0.2 million, but that offer was
rejected. A trial date of January 22, 2007, has been set to hear the matter. The
Company has not recorded any loss provision for this matter as it believes the
complaint to be without merit, but in the event that the plaintiff is successful
in obtaining a favorable result against the Company, Capco plans to seek
reimbursement from the Hoactzin Agreement.

On March 2, 2006, Nabors Offshore Corporation ("Nabors") filed a complaint in
United States District Court, southern district of Texas, against Capco and a
subsidiary, seeking recovery of $0.9 million for unpaid drilling rig service
invoices for a well drilled by the Company during the year 2005. Capco disputes
this claim and in turn has informed Nabors of a counterclaim of $3.7 million for
recovery of excess cost resulting from the actions of Nabors and reimbursement
for fuel cost that was charged to Capco. No trial date has yet been set for this
matter.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of the fiscal year covered by this Annual Report, no
matter was submitted to a vote of our security holders through the solicitation
of proxies or otherwise.


                                       14


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

Our Common Stock has been traded on the Bulletin Board since June 2000. The
following table sets forth the high and low bid prices of the Common Stock in
the over-the-counter market for the periods. The bid prices represent prices
between dealers, and do not include retail markups, markdowns or commissions,
and may not represent actual transactions. Public trading in our Common Stock is
minimal.

       Quarter Ended              Bid High        Bid Low
       -------------              --------        -------

     March 31, 2004               $   0.37        $  0.11
     June 30, 2004                $   0.26        $  0.14
     September 30, 2004           $   0.21        $  0.14
     December 31, 2004            $   0.23        $  0.12
     March 31, 2005               $   0.59        $  0.19
     June 30, 2005                $   0.68        $  0.19
     September 30, 2005           $   0.19        $  0.10
     December 31, 2005            $   0.27        $  0.11


The number of record holders of our Common Stock as of June 30, 2006, is
approximately 581. Additional holders of our Common Stock hold such stock in
street name with various brokerage firms.

Holders of Common Stock are entitled to receive dividends as may be declared by
the Board of Directors out of funds legally available. We have not declared
Common Stock dividends to date, nor do we anticipate declaring and paying Common
Stock cash dividends in the foreseeable future.

The following table presents information regarding our equity compensation plans
at December 31, 2005:

                                                               Number of
                        Number of                              securities
                      securities to                       remaining available
                     be issued upon    Weighted-average   for future issuance
                       exercise of      exercise price         under equity
                       outstanding      of outstanding        compensation
 Plan category          options            options                plans
 -------------       --------------    ----------------   -------------------
Equity compensation
plans approved by
security holders          5,660,000       $    0.14            5,948,077

Equity compensation
plans not approved
by security holders      13,000,000       $    0.15                   --
                         ----------                            ---------
Total                    18,660,000       $    0.14            5,948,077
                         ==========       =========            =========



                                       15


ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that include, among others, statements concerning: the benefits expected
to result from our divestiture of petroleum marketing operations, including
decreased expenses and expenditures that are expected to be realized by us as a
result of the divestiture, and other statements of: expectations, anticipations,
beliefs, estimations, projections, and other similar matters that are not
historical facts, including such matters as: future capital requirements,
development and exploration expenditures (including the amount and nature
thereof), drilling of wells, reserve estimates (including estimates of future
net revenues associated with such reserves and the present value of such future
net revenues), future production of oil and gas, repayment of debt, business
strategies, and expansion and growth of business operations. These statements
are based on certain assumptions and analyses made by our management in light of
past experience and perception of: historical trends, current conditions,
expected future developments, and other factors that our management believes are
appropriate under the circumstances. We caution the reader that these
forward-looking statements are subject to risks and uncertainties, including
those associated with the financial environment, the regulatory environment, and
trend projections, that could cause actual events or results to differ
materially from those expressed or implied by the statements. Such risks and
uncertainties include those risks and uncertainties identified below.

Significant factors that could prevent us from achieving our stated goals
include: declines in the market prices for oil and gas, adverse changes in the
regulatory environment affecting us, the inherent risks involved in the
evaluation of properties targeted for acquisition, our dependence on key
personnel, the availability of capital resources at terms acceptable to us, the
uncertainty of estimates of proved reserves and future net cash flows, the risk
and related cost of replacing produced reserves, the high risk in exploratory
drilling and competition. You should consider the cautionary statements
contained or referred to in this report in connection with any subsequent
written or oral forward-looking statements that may be issued. We undertake no
obligation to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2005, we had a working capital deficit of $2.6 million, due, in
large part, to costs incurred with the drilling of the OCS GA 297 exploratory
well. Subsequent to December 31, 2005, we engaged in several transactions that
directly affected this deficit.

We borrowed $1.4 million under a funding from Hoactzin Partners that was added
to the Aggregate Investment Account, and an additional $0.3 million under a
placement of a convertible promissory note. We used the proceeds from these
fundings primarily to retire indebtedness in the amount of $0.4 million and to
pay certain accrued expenses, including accrued interest related to the
indebtedness, in the total amount of $0.5 million. The balance of the proceeds
from the borrowings was used to pay trade accounts payable and for funding the
acquisition of the Vermillion leases as discussed below.

On June 15, 2006, we sold our equity investment in Capco Marine LLC and
ownership interest in Midway Sunset LLC to one of our shareholders for $1.5
million. The purchaser paid $0.3 million cash and assumed liabilities of $0.2
million. In addition, the purchaser's promissory note of the remaining $1.0
million is due on September 30, 2006, with an option to extend to November 30,
2006.

On June 30, 2006, we received $1.3 million from a warrant holder who tendered
13,333,333 warrants in exchange for 9.0 million shares of fully paid Common
Stock.


                                       16


Net cash provided by operating activities totaled $1.4 million for 2005,
compared to cash provided by operating activities of $3.1 million for 2004. In
2005, net loss, adjusted for reconciling items, resulted in a cash outflow of
$1.7 million. Changes in assets and liabilities in 2005 resulted in a net cash
source of $3.1 million. In 2004, net income, adjusted for reconciling items,
resulted in a cash source of $1.7 million. Changes in assets and liabilities
resulted in an additional cash source of $1.4 million.

Net cash used in investing activities totaled $6.2 million and $3.7 million for
2005 and 2004, respectively. Investments in the Hoactzin management agreement
and Midway Sunset LLC in the amount of $1.4 million, fundings of bond collateral
deposits in the amount of $0.7 million, capital expenditures for oil and gas
property in the amount of $5.5 million, purchase of property and equipment in
the amount of $0.5 million, purchase of marketable securities in the amount of
$0.4 million, and an expenditure of $0.3 million for the re-financing of the
liabilities attributable to assets under contract for sale were the principal
cash outflows in 2005. Proceeds in the amount of $0.5 million from the sale of
oil and gas property, proceeds in the amount of $0.8 million from sales of
interests in the Hoactzin management agreement, proceeds in the amount of $0.4
from the sale of marketable securities, and proceeds in the amount of $1.0
million from the collection of notes receivable were the principal sources of
cash inflow in 2005. A deposit in the amount of $0.4 million on a property
acquisition, advances to related parties in the amount of $0.5 million, capital
expenditures for oil and gas property in the amount of $2.9 million, purchases
of other property and equipment in the amount of $0.7 million and the issuance
of notes receivable in the amount of $1.0 million were the principal cash
outflows in 2004. Proceeds in the amount of $1.7 million from the sale of oil
and gas properties were the principal source of cash inflow in 2004.

Net cash provided by financing activities totaled $3.8 million and $2.4 million
for 2005 and 2004, respectively. In 2005, proceeds from borrowings provided cash
inflows of $0.7 million, and increases in long-term liabilities provided
additional cash inflow of $0.2 million. The sale of Common Stock provided cash
inflow of $4.3 million in 2005. Payments on notes payable and long-term debt
resulted in a cash outflow of $1.2 million in 2005. An additional $0.2 million
was expended in 2005 for the re-purchase of Common Stock. Proceeds from
borrowings and an increase in long-term liabilities provided cash inflows of
$3.4 million and $0.4 million, respectively, in 2004. Payments on long-term debt
resulted in a cash outflow of $1.4 million in 2004.

Our long-term debt decreased from $1.1 million at December 31, 2004, to $0.7
million at December 31, 2005. We received proceeds of $0.4 million to pay for
asset and treasury stock purchases, and to fund service company costs, and we
paid $0.8 million during 2005 to retire long-term debt. The balance of
convertible promissory notes increased from $1.6 million to $2.1 million, as
additional notes in the amount of $0.5 million were issued during the year. The
balance of short-term notes payable decreased from $0.8 million at December 31,
2004, to $17,000 at December 31, 2005, as a result of payments made during the
year.

We have various loans which will require principal payments of $0.6 million in
2006. Of this amount, $0.4 million is owed to one party. We paid this obligation
in full in June 2006 with funds received from the Hoactzin management agreement.
The remainder of the principal payments are anticipated to be made from cash
flow available from our operations of producing property, and from proceeds from
the sale of assets and equity and/or debt funding.

To the extent such cash flow is insufficient to make the debt payments and
provide adequate working capital for our business, we may be required to reduce
or curtail certain operations or seek other sources of capital. We have
historically secured financing for our acquisition and development activities on
a project-financing basis. Such financing has included the sale of portions of
target acquisitions or drilling ventures to third parties, participation with
co-venturers on financing arranged by the other party, private borrowings from
individuals and private placements of our Common Stock. Other than financing
arrangements already consummated in the first six months of 2006, we do not have
any agreements or arrangements providing for such financing and it may not be
available on terms acceptable to us.


                                       17


In addition to debt service requirements, we have several other obligations that
affect our available cash flow. We are obligated to pay operating lease costs of
approximately $0.1 million in 2006 for land and facilities and have an
obligation to a surety company to make monthly cash collateral deposits of
$24,000 over a period of thirteen months, ending February 2007. Various purchase
agreements require that funding obligations of $1.1 million and $0.3 million be
paid from the net profits, if any, derived from the respective operations of the
properties. A total of $14,000 was paid in 2005 against the $0.3 million
obligation. Utilization of available cash flow to fund these requirements may
affect our ability to adequately fund other planned activities.

We disposed of our equity ownership in certain business interests
("Enterprises") during the year 2003, but remained as guarantor of certain
indebtedness incurred by Enterprises prior to the date of sale by us. As of
December 31, 2005, we were the guarantor of $1.3 million of obligations for
trade accounts, real estate and equipment purchases and leases owed by
Enterprises. The obligations are being serviced by Enterprises, and we believe
that there is sufficient underlying collateral value in the related assets to
significantly reduce the exposure of loss to us. Subsequent to December 31,
2005, Enterprises effected significant reductions to the outstanding
indebtedness, such that as of April 30, 2006, the amount subject to our
guarantee was $0.2 million.

We were also the guarantor of indebtedness issued to one lender by Graves, a
former subsidiary of Enterprises, in the amount of $3.9 million at December 31,
2004. Our Chief Executive Officer owns Graves. In October 2005, a restructuring
of the indebtedness provided for our removal as a guarantor of the indebtedness,
although we are a party to an indemnification agreement that survived the
settlement. Pursuant to the terms of the indemnification agreement, our
liability for the items covered by the indemnification is limited to $0.3
million. For our part in the restructuring we agreed to fund a total of $0.3
million to be applied to the outstanding indebtedness. Of this amount, $0.2
million was paid in December 2005, and $0.1 million was paid in January 2006. We
also granted 1.8 million warrants to Hoactzin as consideration for its
participation in the refinancing of the indebtedness. Using the Black Scholes
pricing model, the warrants were determined to have a fair value of $0.3
million, which has been charged to operations, with a corresponding increase to
paid in capital. The warrants are exercisable for a period of five years with an
exercise price of $0.195 per share.

We are responsible for any contamination of land we own or lease. However, there
may be limitations on any potential contamination liabilities as well as claims
for reimbursement from third parties.

We sell most of our oil production to certain major oil companies. However, in
the event these purchasers discontinued oil purchases, we have made contact with
other purchasers who would purchase the oil at terms standard in the industry.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material exposure to interest rate changes.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2005, COMPARED TO YEAR ENDED DECEMBER 31, 2004

Our revenues from oil and gas sales were $2.6 million in 2005 compared to $4.8
million in 2004. This decrease is due to a decrease in production volumes offset
by an increase in product prices paid at the wellhead. On a barrel of oil
equivalent ("BOE") basis, our price per BOE increased to $43.03 in 2005 from
$33.67 in 2004, resulting in an increase in revenue of $1.3 million. Total
production was 61,500 BOE in 2005, compared with 143,300 BOE in 2004, resulting
in a decrease in revenue of $3.5 million. This decrease was due principally to
the disposition of certain producing properties during the year 2004. Such
properties provided BOE of 91,700 and revenue of $3.0 million in 2004. These
decreases were partially offset by our remaining producing properties, which
reported an increase in production and revenue of 9,800 BOE and $0.8 million,
respectively. Our revenue from gas gathering, marketing, and processing, and oil
field services increased to $0.9 million in 2005 from $0.4 million in 2004 due
to increased utilization of our marine vessels at the Brazos property and our
on-land service rigs.


                                       18


In 2004, we recorded gains of $0.6 million and $0.4 million from the sale of
land and oil and gas properties, respectively. We did not have any such gains in
2005.

Our oil and gas production lifting costs, including expensed workovers,
decreased to $1.5 million in 2005 from $1.6 million in 2004. Although production
volumes decreased 57% from 143,300 BOE in 2004 to 61,500 BOE in 2005, our
lifting costs registered only a minimal decrease, as the properties sold in 2004
were primarily gas properties with lower associated operating costs. The oil
properties in Oklahoma, which we acquired in late 2004, and operated throughout
the year 2005, incurred higher per unit operating costs due to the level of
expenditures necessary to keep the wells in production. Production taxes
decreased to $0.2 million in 2005 from $0.5 million in 2004 and gas gathering,
marketing and processing decreased to $0.2 million in 2005 from $0.8 million in
2004, all due principally to the decrease in production volumes from 143,300 BOE
in 2004 to 61,500 BOE in 2005. Our oil field services expenses increased from
$0.2 million in 2004 to $0.8 million in 2005 due to increased utilization of our
marine vessels at the Brazos property and our on-land service rigs.

Net operating revenues from our oil and gas production are very sensitive to
changes in the price of oil making it very difficult for management to predict
whether or not we will be profitable in the future.

General and administrative expenses were $2.1 million in 2005 and $1.3 million
in 2004. The change is due to an increase in employment levels in our Houston,
Texas office necessitated by the properties operated by us in the Texas Gulf
Coast.

Depreciation, depletion and accretion were $1.3 million in 2005 and $0.8 million
in 2004. This change is attributable to cost additions to our full cost pool
during the year 2005 for which there were no associated proved reserves,
resulting in an increase in the per unit cost depletion rate.

Interest income increased to $69,000 in 2005 from $19,000 in 2004 due
principally to earnings on cash collateral deposits with our surety company.

Interest expense was $0.4 million in both 2005 and 2004. Although
interest-bearing indebtedness declined from $3.5 million at the beginning of the
year to $2.8 million at the end of the year, most of the change occurred in the
second half of the year such that interest expense remained virtually unchanged
throughout the entire year.

Losses from sale of marketable securities, including unrealized holding losses,
decreased from a loss of $0.1 million in 2004 to a loss of $9,000 in 2005. The
loss in 2004 was due principally to market value declines, while the loss in
2005 was the result of losses sustained in positions that were taken with
available cash on a short-term basis. Other expenses increased to $0.3 million
due to net profit distributions.


                                       19


EFFECT OF CHANGES IN PRICES

Changes in prices during the past few years have been a significant factor in
the oil and gas industry. The price received for the oil produced by us
fluctuated significantly during the last year. Changes in the price that we
receive for our oil and gas is set by market forces beyond our control as well
as governmental intervention. The volatility and uncertainty in oil and gas
prices have made it more difficult for a company like us to increase our oil and
gas asset base and become a significant participant in the oil and gas industry.
We sell most of our oil and gas production to certain major oil companies.
However, in the event these purchasers discontinued oil and gas purchases, we
has made contact with other purchasers who would purchase the oil and gas at
terms standard in the industry.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates our estimates and judgments, including those related
to revenue recognition, recovery of oil and gas reserves, financing operations,
and contingencies and litigation.

Oil and Gas Properties

We follow the "full-cost" method of accounting for oil and gas property and
equipment costs. Under this method, all productive and nonproductive costs
incurred in the acquisition, exploration, and development of oil and gas
reserves are capitalized. Such costs include lease acquisitions, geological and
geophysical services, drilling, completion, equipment, and certain general and
administrative costs directly associated with acquisition, exploration, and
development activities. General and administrative costs related to production
and general overhead are expensed as incurred. No gains or losses are recognized
upon the sale or disposition of oil and gas properties, except in transactions
that involve a significant amount of reserves.

Proceeds from the sale of oil and gas properties are generally treated as a
reduction of oil and gas property costs. Fees from associated oil and gas
exploration and development partnerships, if any, will be credited to oil and
gas property costs to the extent they do not represent reimbursement of general
and administrative expenses currently charged to expense.

In accordance with the full cost method of accounting, future development, site
restoration and dismantlement and abandonment costs, net of salvage values, are
estimated on a property-by-property basis based on current economic conditions
and are amortized to expense as our capitalized oil and gas property costs are
amortized.

The provision for depreciation and depletion of oil and gas properties is
computed on the unit-of-production method. Under this method, we compute the
provision by multiplying the total unamortized costs of oil and gas properties
including future development, site restoration, and dismantlement abandonment
costs, but excluding costs of unproved properties by an overall rate determined
by dividing the physical units of oil and gas produced during the period by the
total estimated units of proved oil and gas reserves. This calculation is done
on a country-by-country basis. As of December 31, 2005, all of our oil
production operations are conducted in the United States of America. The cost of
unevaluated properties not being amortized, to the extent there is such a cost,
is assessed quarterly to determine whether the value has been impaired below the
capitalized cost. The cost of any impaired property is transferred to the
balance of oil and gas properties being depleted. The costs associated with
unevaluated properties relate to projects which were undergoing exploration or
development activities or in which we intend to commence such activities in the
future. We will begin to amortize these costs when proved reserves are
established or impairment is determined. Management believes no such impairment
exists at December 31, 2005.


                                       20


In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations,"
we report a liability for any legal retirement obligations on our oil and gas
properties. The associated costs are capitalized as part of the full cost pool.
Following is a reconciliation of the asset retirement obligation liability for
the year ended December 31, 2005 (in thousands):

Asset retirement obligation at January 1, 2005              $ 2,193
Liabilities incurred                                          1,759
Liabilities settled                                             (45)
Accretion expense                                                87
Revisions in estimated liabilities                               --
                                                            -------
Asset retirement obligation at December 31, 2005            $ 3,994
                                                            =======

At the end of each reporting period, the unamortized cost of oil and gas
properties, net of related deferred income taxes, is limited to the sum of the
estimated future net revenues from proved properties using current prices,
discounted at 10%, and the lower of cost or fair value of unproved properties,
adjusted for related income tax effects ("Ceiling Limitation").

The calculations of the ceiling limitation and provision for depreciation,
depletion, and amortization are based on estimates of proved reserves. There are
numerous uncertainties inherent in estimating quantities of proven reserves and
in projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.

Revenue Recognition

We recognize revenue upon transfer of ownership of the product to the customer
which occurs when (i) the product is physically received by the customer, (ii)
we issue an invoice to the customer which evidences an arrangement between the
customer and us, (iii) a fixed sales price has been included in such invoice,
and (iv) collection from such customer is probable.

ITEM 7.  FINANCIAL STATEMENTS.

Included at Pages F-1 through F-34 hereof.


                                       21


           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
  Capco Energy, Inc. and Subsidiaries
  Houston, Texas

We have audited the accompanying consolidated balance sheet of Capco Energy,
Inc. and Subsidiaries, as of December 31, 2005, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year
ended December 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Capco Energy, Inc.
and Subsidiaries as of December 31, 2005, and the results of its operations and
its cash flows for the year ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of America.


/s/ Malone & Bailey, PC
- -----------------------
Malone & Bailey, PC
www.malone-bailey.com
Houston, Texas


June 23, 2006


                                      F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders
Capco Energy, Inc. and Subsidiaries


We have audited the consolidated statements of operations, comprehensive income
(loss), stockholders' equity, and cash flows for the year ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of its operations and its cash
flows for the year ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.


/s/ Stonefield Josephson, Inc.
- ------------------------------
CERTIFIED PUBLIC ACCOUNTANTS


Irvine, California
April 1, 2005 (July 19, 2006, as to the effects of the reclassification as
disclosed in Note 1)


                                      F-2


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2005
                                     ASSETS
                             (Dollars in Thousands)


Current Assets:
  Cash                                                    $   762
  Accounts receivable-trade, net of
    allowance of $45                                          671
  Prepaid and other current assets                            244
                                                          -------

     Total Current Assets                                   1,677


Oil and gas properties, using full cost accounting,
  less accumulated depreciation and depletion of $2,902    14,623

Other Assets:
  Other property and equipment, less accumulated
    depreciation of $147                                    1,097
  Cost of financing under management agreement             10,092
  Bond deposits                                             3,004
  Other assets                                                388
                                                          -------


                       Total Assets                       $30,881
                                                          =======

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-3


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEET (continued)
                                DECEMBER 31, 2005
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                             (Dollars in Thousands)

Current Liabilities:
  Accounts payable, trade                               $  2,470
  Accounts payable, related party                             84
  Current maturities of convertible debt                      25
  Current maturities of long-term debt                       556
  Current maturities of long-term debt, related party         77
  Accrued expenses                                         1,117
                                                        --------
     Total Current Liabilities                             4,329
                                                        --------
Non-current Liabilities:
  Accounts payable, related parties                           49
  Long term debt, less current maturities                     98
  Convertible promissory notes, net                        2,046
  Other long-term liabilities                              1,417
  Asset retirement obligation                              3,994
                                                        --------
     Total Non-current Liabilities                         7,604
                                                        --------

     Total Liabilities                                    11,933
                                                        --------

Commitments and Contingencies (Note 9)                        --

Stockholders' Equity:
Common stock, $0.001 par value;
  authorized 500,000,000 shares;
  118,548,477 shares issued                                  119
Additional paid in capital                                20,584
Treasury stock, 2,467,708 shares, at cost                   (344)
Retained deficit                                          (1,411)
                                                        --------
     Total Stockholders' Equity                           18,948
                                                        --------
     Total Liabilities and
     Stockholders' Equity                               $ 30,881
                                                        ========


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-4


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  For the Years ended December 31, 2005 and 2004
                     (Dollars in Thousands except per share)

                                                      2005            2004
                                                  ------------    ------------
Operating revenues
  Oil and gas sales                               $      2,646    $      4,825
  Gas gathering marketing and processing                    --             275
  Oil field services                                       926             155
  Gains on sales of land and oil and gas property           --             974
                                                  ------------    ------------
    Total operating revenues                             3,572           6,229
                                                  ------------    ------------
Operating costs and expenses
  Oil and gas production lifting costs                   1,530           1,569
  Production taxes                                         178             478
  Gas gathering, marketing and processing costs            166             768
  Oil field services                                       818             172
  Net profits distributions                                396              --
  Depreciation, depletion and accretion                  1,339             809
  General and administrative                             2,128           1,266
                                                  ------------    ------------
    Total operating costs and expenses                   6,555           5,062
                                                  ------------    ------------

    Operating (loss) profit                             (2,983)          1,167

Other Income (Expenses):
  Interest income                                           69              19
  Interest expense                                        (408)           (399)
  Losses on sales of investments-
     marketable securities                                  (9)            (63)
  Holding losses-marketable securities                      --              (2)
  Other                                                   (282)              3
                                                  ------------    ------------
     (Loss) income before taxes                         (3,613)            725

Provision for income taxes                                  --              --
                                                  ------------    ------------
     Net (loss) income                            $     (3,613)   $        725
                                                  ============    ============

Earnings per share-basic:                         $      (0.03)   $       0.01
Earnings per share-diluted:                       $      (0.03)   $       0.01
                                                  ============    ============
Weighted average common share and common
  share equivalents:
  Basic                                            112,845,317      96,067,502
  Diluted                                          122,640,846     105,741,590
                                                  ============    ============

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-5


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2005 and 2004
                             (Dollars in Thousands)



                                                                                Accumulated
                             Common Stock          Additional    Treasury        (Deficit)/
                       -------------------------     Paid-In       Stock         Retained
                          Shares       Amount        Capital                      Earnings      Total
                       -----------   -----------   -----------   -----------    -----------   -----------
                                                                            
Balances at
December 31,
2003                    95,983,716   $        96   $     2,429   $      (127)   $     1,477   $     3,875

Treasury stock                  --            --            --           (11)            --           (11)
(acquisitions)

Shares sold for cash     1,095,000             1            70            --             --            71

Shares issued in
settlement of
liability                  300,000            --            30            --             --            30

Shares issued
for acquisition
of property              3,644,760             4           433            --             --           437

Discount on
convertible notes               --            --           112            --             --           112

Net income                      --            --            --            --            725           725
                       -----------   -----------   -----------   -----------    -----------   -----------
Balances at
December 31,
2004                   101,023,476   $       101   $     3,074   $      (138)   $     2,202   $     5,239


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-6


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2005 and 2004
                             (Dollars in Thousands)


                                                                                Accumulated
                             Common Stock          Additional    Treasury        (Deficit)/
                       -------------------------     Paid-In       Stock         Retained
                          Shares       Amount        Capital                      Earnings      Total
                       -----------   -----------   -----------   -----------    -----------   -----------
                                                                            
Balances at
December 31,
2004                   101,023,476   $       101   $     3,074   $      (138)   $     2,202    $     5,239

Treasury stock                  --            --            --          (206)            --           (206)
(acquisitions)

Shares sold for cash    15,225,000            15         4,370            --             --          4,385

Shares issued in
settlement of
liabilities              2,000,001             2           373            --             --            375

Shares issued
for conversion
of promissory notes        300,000             1            59            --             --             60

Fair value of
warrants issued                 --            --        12,708            --             --         12,708

Net loss                        --            --            --            --         (3,613)        (3,613)
                       -----------   -----------   -----------   -----------    -----------    -----------
Balances at
December 31,
2005                   118,548,477   $       119   $    20,584   $      (344)   $    (1,411)   $    18,948
                       ===========   ===========   ===========   ===========    ===========    ===========


The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-7


                      CAPCO ENERGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2005 and 2004
                             (Dollars in Thousands)

                                                        2005      2004
                                                      -------    -------
Cash Flows From Operating Activities:
  Net (loss) income                                   $(3,613)   $   725
  Adjustments to reconcile net (loss) income
   to net cash used in operating activities:
     Depreciation, depletion, accretion
       and amortization                                 1,424        809
     Share-based compensation                             158         --
     Foreign currency translation adjustment               --         57
     Loss on sales of investments - marketable
       securities                                           9         63
     Loss on settlement of guarantor obligation           305         --
     Loss on debt conversions                              15         --
     Holding losses - marketable securities                --          2
     Increase in deferred tax asset                        --     (1,298)
     Increase in deferred tax liability                    --      1,298
  Changes in assets and liabilities:
     Accounts receivable - trade                         (189)      (225)
     Notes receivable (accrued interest)                   --          2
     Other current assets                                 (81)      (113)
     Other assets                                          12         (5)
     Accounts payable                                   2,974        937
     Accrued expenses                                     344        812
                                                      -------    -------
Net cash provided by operating activities               1,358      3,064
                                                      -------    -------

Cash Flows From Investing Activities:
     Acquisition of subsidiary, net of cash                --          4
     Cost of financing under management agreement      (1,117)        --
     Funding of bond collateral                          (713)        (8)
     Deposit on property acquisition                       --       (400)
     Net repayments (advances) with related parties        49       (511)
     Proceeds from sales of oil and gas property          500      1,736
     Proceeds from sales of interests in investment
      in Hoactzin management agreement                    770         --
     Purchase of other assets                            (312)       (50)
     Capital expenditures for oil and gas property     (5,545)    (2,872)
     Purchase of property and equipment                  (525)      (652)
     Proceeds from sale of marketable securities          390        128
     Purchase of marketable securities                   (398)        --
     Increase in assets attributable to businesses
      under contract for sale                            (283)       (50)
     Collection (issuance) of notes receivable            981       (981)
                                                      -------    -------
   Net cash used in investing activities               (6,203)    (3,656)
                                                      -------    -------

Continued on Next Page
The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-8


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2005 and 2004
                             (Dollars in Thousands)
                                   (continued)

                                                            2005        2004
                                                          --------    --------
Cash Flows From Financing Activities:
     Proceeds from issuance of debt                            204       1,752
     Proceeds from production payable                          150          --
     Proceeds from convertible promissory
      notes, net                                               460       1,628
     Increase in long-term liabilities                          --         361
     Payments on notes payable                                (345)         --
     Payments on long term debt                               (846)     (1,438)
     Sale of Common Stock and exercise of options            4,385          71
     Purchase of Common Stock                                 (206)        (12)
                                                          --------    --------
   Net cash provided by financing activities                 3,802       2,362
                                                          --------    --------

   Net (decrease) increase in cash                          (1,043)      1,770
   Cash, beginning of period                                 1,805          35
                                                          --------    --------
   Cash, end of period                                    $    762    $  1,805
                                                          ========    ========

Supplemental disclosure of cash flow information:

Interest paid                                             $    233    $    333
                                                          ========    ========
Taxes paid                                                $     --    $     --
                                                          ========    ========

Supplemental disclosure of non-cash financing and
investing activities:

Common Stock issued for conversions of promissory notes   $     60    $     --
                                                          ========    ========

Common Stock issued in settlement of liabilities          $    375    $     30
                                                          ========    ========
Note payable settled in connection with transfer
  of oil and gas property interest                        $    400    $     --
                                                          ========    ========
Cost of warrants issued in connection with
  management agreement                                    $ 11,745    $     --
                                                          ========    ========
Reversal of liability for businesses under contract
  for sale                                                $  4,346    $     --
                                                          ========    ========


                                      F-9


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2005 and 2004
                             (Dollars in Thousands)
                                   (continued)

Increase in liability for asset retirement
  obligation                                       $  1,758   $ 1,088
                                                   ========   =======
Reduction in oil and gas property additions
  as originally invoiced due to settlement of
  accounts payable for reduced amounts             $    657   $    --
                                                   ========   =======
 Paid in capital provided as equity component of
  debt financing                                   $     --   $   112
                                                   ========   =======
Acquisition cost of oil and gas property
  settled with issuance of Common Stock            $     --   $   437
                                                   ========   =======
Accrual for acquisition cost of oil and gas
  property to be settled with issuance of
  Common Stock                                     $     --   $   200
                                                   ========   =======
Long-term debt and liabilities reduced
  for property sold                                $     --   $ 3,297
                                                   ========   =======
Long-term liability (released) assumed in
  connection with guaranty of indebtedness         $     --   $  (432)
                                                   ========   =======

The accompanying notes are an integral part of the consolidated financial
statements.


                                      F-10


                       CAPCO ENERGY, INC. AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                December 31, 2005

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Capco Energy, Inc. ("Capco" or "the Company") is an independent energy company
engaged primarily in the acquisition, development, production of and the sale of
oil, gas and natural gas liquids. The Company's production activities are
located in the United States of America. The principal executive offices of the
Company are located at 5555 San Felipe, Suite 725, Houston, TX 77056. The
Company was incorporated as Alfa Resources, Inc., a Colorado corporation, on
January 6, 1981. In November 1999, the Company amended its articles of
incorporation to change its name from Alfa Resources, Inc. to Capco Energy, Inc.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Capco and it's
wholly and majority owned subsidiaries. Accordingly, all references herein to
Capco or the Company include the consolidated results. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The Company's significant subsidiaries in 2005 include Capco Operating
Corporation, Capco Offshore, Inc., and Packard Gas Company, and in 2004 included
Capco Offshore, Inc. and Packard Gas Company.

Effective April 1, 2005, the Company divested its 80% equity interest in Bison
Energy Company ("Bison") that was acquired from a Director of the Company during
the year 2004, by selling the interest to the Director for the Company's
original investment. Bison is the owner of an oil property in the state of
Wyoming. Operations from the property resulted in cumulative losses in the
amount of $29,000 since the date of acquisition. Capco recorded a gain in the
amount of $29,000 in 2005 as a result of the disposition. Funding provided to
Bison by Capco in 2004 in the amount of $50,000 that had previously been
accounted for as an advance to Bison was reclassified as a payment against
long-term debt owed to the Director.

RISK FACTORS RELATED TO CONCENTRATION OF SALES AND PRODUCTS

The Company's future financial condition and results of operations will depend
upon prices received for its oil and natural gas and the costs of finding,
acquiring, developing and producing reserves. Prices for oil and natural gas are
subject to fluctuations in response to changes in supply, market uncertainty and
a variety of other factors beyond the Company's control. These factors include
worldwide political instability (especially in the Middle East), the foreign
supply of oil and natural gas, the price of foreign imports, the level of
consumer product demand and the price and availability of alternative fuels.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management used significant estimates in determining the carrying value of its
oil and gas producing assets and the associated depreciation and depletion
expense related to sales' volumes. The significant estimates included the use of
proved oil and gas reserve volumes and the related present value of estimated
future net revenues there-from (See Supplemental Information About Oil and Gas
Producing Activities).

                                      F-11


CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of short-term, highly liquid investments
readily convertible into cash with an original maturity of three months or less.
The Company maintains its cash in bank deposit accounts that, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company had $0.5 million cash balances in excess of federal
insured limits as of December 31, 2005.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company measures its financial assets and liabilities in accordance with
accounting principles generally accepted in the United States of America. For
certain of the Company's financial instruments, including accounts receivable
(trade and related party), notes receivable and accounts payable (trade and
related party), and accrued expenses, the carrying amounts approximate fair
value due to their short maturities. The amounts owed for long-term debt also
approximate fair value because interest rates and terms offered to the Company
are at current market rates.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of
credit risk are: cash and accounts receivable arising from its normal business
activities. The Company places its cash in what it believes to be credit-worthy
financial institutions. However, cash balances have exceeded the FDIC insured
levels at various times during the year. The Company has a diversified customer
base. The Company controls credit risk related to accounts receivable through
credit approvals, credit limits and monitoring procedures. The Company routinely
assesses the financial strength of its customers and, based upon factors
surrounding the credit risk, establishes an allowance, if required, for
un-collectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited. The Company
had an allowance of $45,000 as of December 31, 2005, that was based on its
evaluation of specific customers' balances and the collectibility thereof.

INVESTMENT IN EQUITY SECURITIES

For equity securities that the Company i) does not exercise control in the
investee and ii) expects to divest within a short period of time, the Company
accounts for the investment under the provisions of Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". In accordance with FASB
No. 115, equity securities that have readily determinable fair values are
classified as either trading or available-for-sale securities. Securities that
are bought and held principally for the purpose of selling in the near term
(thus held for only a short period of time) are classified as trading securities
and all other securities are classified as available-for-sale. Trading and
available-for-sale securities are measured at fair value in the balance sheet.
For trading securities any realized gains or losses and any unrealized holding
gains and losses are reported in the statement of operations. For
available-for-sale securities any realized gains and losses are reported in the
statement of operations and any unrealized holding gains and losses are reported
as a separate component of stockholders' equity until realized.

                                      F-12


OIL AND GAS PROPERTIES

Capco follows the "full-cost" method of accounting for oil and gas property and
equipment costs. Under this method, all productive and nonproductive costs
incurred in the acquisition, exploration, and development of oil and gas
reserves are capitalized. Such costs include lease acquisitions, geological and
geophysical services, drilling, completion, equipment, and certain general and
administrative costs directly associated with acquisition, exploration, and
development activities. General and administrative costs related to production
and general overhead are expensed as incurred. No gains or losses are recognized
upon the sale or disposition of oil and gas properties, except in transactions
that involve a significant amount of reserves.

Proceeds from the sale of oil and gas properties are generally treated as a
reduction of oil and gas property costs. Fees from associated oil and gas
exploration and development partnerships, if any, will be credited to oil and
gas property costs to the extent they do not represent reimbursement of general
and administrative expenses currently charged to expense.

In accordance with the full cost method of accounting, future development, site
restoration and dismantlement and abandonment costs, net of salvage values, are
estimated on a property-by-property basis based on current economic conditions
and are amortized to expense as the Company's capitalized oil and gas property
costs are amortized.

The provision for depreciation and depletion of oil and gas properties is
computed on the unit-of-production method. Under this method, the Company
computes the provision by multiplying the total unamortized costs of oil and gas
properties including future development, site restoration, and dismantlement
abandonment costs, but excluding costs of unproved properties by an overall rate
determined by dividing the physical units of oil and gas produced during the
period by the total estimated units of proved oil and gas reserves. This
calculation is done on a country-by-country basis. As of December 31, 2005, all
of the Company's oil production operations are conducted in the United States of
America. The cost of unevaluated properties not being amortized, to the extent
there is such a cost, is assessed quarterly to determine whether the value has
been impaired below the capitalized cost. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted. The costs
associated with unevaluated properties relate to projects which were undergoing
exploration or development activities or in which the Company intends to
commence such activities in the future. The Company will begin to amortize these
costs when proved reserves are established or impairment is determined.
Management believes no such impairment exists at December 31, 2005.

In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations",
the Company reports a liability for any legal retirement obligations on its oil
and gas properties. The associated costs are capitalized as part of the full
cost pool.

Following is a reconciliation of the asset retirement obligation liability for
the year ended December 31, 2005 (in thousands):

Asset retirement obligation at January 1, 2005     $ 2,193
Liabilities incurred                                 1,759
Liabilities settled                                    (45)
Accretion expense                                       87
                                                   -------
Asset retirement obligation at December 31, 2005   $ 3,994
                                                   =======

                                      F-13


At the end of each reporting period, the unamortized cost of oil and gas
properties, net of related deferred income taxes, is limited to the sum of the
estimated future net revenues from proved properties using current prices,
discounted at 10%, and the lower of cost or fair value of unproved properties,
adjusted for related income tax effects ("ceiling limitation").

The calculations of the ceiling limitation and provision for depreciation,
depletion, and amortization are based on estimates of proved reserves. There are
numerous uncertainties inherent in estimating quantities of proven reserves and
in projecting the future rates of production, timing, and plan of development.
The accuracy of any reserves estimate is a function of the quality of available
data and of engineering and geological interpretation and judgment. Results of
drilling, testing, and production subsequent to the date of the estimate may
justify revision of such estimate. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.

OTHER PROPERTY AND EQUIPMENT

Non-oil and gas producing properties and equipment are stated at cost; major
renewals and improvements are charged to the property and equipment accounts;
while replacements, maintenance and repairs, which do not improve or extend the
lives of the respective assets, are expensed currently. At the time property and
equipment are retired or otherwise disposed of, the asset and related
accumulated depreciation accounts are relieved of the applicable amounts. Gains
or losses from retirements or sales are credited or charged to operations.

Depreciation for non-oil and gas properties is recorded on the straight-line
method at rates based on estimated useful lives ranging from three to fifteen
years of the assets.

IMPAIRMENT OF LONG-LIVED ASSETS

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." Although retaining many of the fundamental recognition and
measurement provisions of SFAS No. 121, the new rules significantly change the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also supersedes certain provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period or periods in which the losses are incurred rather than as of the
measurement date, as presently required. The Company adopted this new statement
on January 1, 2002, and concluded that the effect of adopting this statement had
no material impact on its financial position, results of operations, or cash
flows.

REVENUE RECOGNITION

The Company recognizes revenue upon transfer of ownership of the product to the
customer which occurs when (i) the product is physically received by the
customer, (ii) the Company issues an invoice to the customer which evidences an
arrangement between the customer and the Company, (iii) a fixed sales price has
been included in such invoice, and (iv) collection from such customer is
probable.

STOCK BASED COMPENSATION

The Company accounts for employee stock options in accordance with APB No. 25
"Accounting for Stock Issued to Employees". Under APB 25, the Company recognizes
no compensation expense related to employee stock options, as no options are
granted at a price below market price on the date of grant.

                                      F-14


In 2002, the Company adopted SFAS No.123 "Accounting for Stock-Based
Compensation". SFAS No. 123, which prescribes the recognition of compensation
expense based on the fair value of options on the grant date, and allows
companies to continue applying APB 25 if certain pro forma disclosures are made
assuming hypothetical fair value method, for which the Company uses the
Black-Scholes option-pricing model. For non-employee stock based compensation
the Company recognizes an expense in accordance with SFAS No. 123 and values the
equity securities based on the fair value of the security on the date of grant.
For stock-based awards the value is based on the market value for the stock on
the date of grant and if the stock has restrictions as to transferability a
discount is provided for lack of tradability. Stock option awards are valued
using the Black-Scholes option-pricing model.

Had compensation cost been determined based on the fair value at grant dates for
stock option awards consistent with the SFAS No. 123, the Company's net (loss)
income and earnings per share for the years ended December 31, 2005 and 2004,
would have been adjusted to the pro-forma amounts indicated below (dollars in
thousands, except per share):
                                                 2005       2004
                                               -------    -------
      Net (loss) income as reported            $(3,613)   $   725
      Compensation recognized under APB 25          --         --
      Compensation recognized under SFAS 123      (450)      (218)
                                               -------    -------
      Pro-forma net (loss) income              $(4,063)   $   507
                                               =======    =======
      Net (loss) income per share:
      Basic and diluted-as reported            $ (0.03)   $  0.01
      Basic and diluted-pro-forma              $ (0.03)   $  0.01

The pro forma compensation expense based on the fair value of the options is
estimated on the grant date using the Black-Scholes option-pricing model with
the following assumptions used for grants: no dividends; expected lives ranging
from 1 to 5 years for 2005 and from 3 to 5 years for 2004; expected volatility
ranging from 244% to 246% for 2005 and from 85% to 217% for 2004; and risk free
rates of return ranging from 3.84% to 3.90% for 2005 and from 3.29% to 3.74% for
2004. The weighted average fair value of those purchase rights granted in 2005
and 2004 was $0.20 and $0.13, respectively.

INCOME TAXES

Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred taxes on temporary differences between the amount of
taxable income and pretax financial income and between the tax bases of assets
and liabilities and their reported amounts in the financial statements.

Deferred tax assets and liabilities are included in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in SFAS No. 109, "Accounting for Income Taxes". As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be recognized. The Company has recorded a 100% valuation
allowance as of December 31, 2005.

                                      F-15


EARNINGS PER SHARE

The Company uses SFAS No. 128, "Earnings Per Share" for calculating the basic
and diluted earnings (loss) per share. Basic earnings (loss) per share are
computed by dividing net income (loss) attributable to common stockholders by
the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except
that the numerator is increased by the amount of interest expense attributable
to the convertible promissory notes payable and the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. On a diluted basis, the weighted average number of shares
outstanding for the year ended December 31, 2005, have been increased for
9,795,529 shares of Common Stock determined under the "if converted" method, due
to outstanding convertible promissory notes during the year. Under the treasury
method of calculating additional shares outstanding, the Company's weighted
average number of shares outstanding for the year ended December 31, 2005, would
have been increased for 8,098,153 shares of Common Stock if associated stock
options and warrants would have had a dilutive effect. Due to the net loss
reported by the Company, the effect of including shares attributable to stock
options and warrants would have been antidilutive. On a diluted basis, under the
treasury method of calculating the additional shares outstanding, the Company's
weighted average shares outstanding for 2004, have been increased for 5,192,941
shares of Common Stock as associated stock options have a dilutive effect on net
income. Additionally, the number of shares outstanding for 2004, have been
increased for 4,481,148 shares of Common Stock determined under the "if
converted" method, due to the issuance of convertible notes payable during 2004.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The impact of the adoption of SFAS 123(R) would be
similar to the Company's calculation of the pro forma impact on results of
operations included in Note 1 above.

Capco does not expect the adoption of any other recently issued accounting
pronouncements to have a significant impact on its results of operations,
financial positions or cash flows.

RECLASSIFICATION

Certain amounts have been reclassified in the prior year to be consistent with
the classification as of December 31, 2005.

2. BUSINESS COMBINATION, ACQUISITION AND DIVESTITURES:

The Company had the following acquisitions and divestments during 2005:

Effective April 1, 2005, the Company divested its 80% equity interest in Bison
Energy Company ("Bison") that was acquired from a Director of the Company during
2004, by selling the interest to the Director for the Company's original
investment. Bison is the owner of an oil property in the state of Wyoming.
Operations from the property resulted in cumulative losses of $29,000 since the
date of acquisition. Capco recorded a gain of $29,000 in 2005 from the
disposition. Funding provided to Bison by Capco in 2004 of $50,000 that had
previously been accounted for as an advance to Bison was reclassified as a
payment against long-term debt owed to the Director.

                                      F-16


On May 4, 2005, the Company closed on a Purchase and Sale Agreement and a
Management Agreement ("Agreement") with Hoactzin Partners, L.P., ("Hoactzin") an
oil and gas investment affiliate of New York based investment firm Dolphin Asset
Management Corp. The Company sold to Hoactzin its interests in High Island Block
196 which were acquired in February 2005, a portion of its interests in two
producing wells and one idle well in the Brazos Field in Texas state waters, and
a portion of its interest in the OCS Galveston Block 297 well on which drilling
operations were in progress at that date. The sale also included working
interests ranging from 14% to 100% in 11 producing wells situated on
approximately 13,300 gross acres located in St. Bernard Parish, Louisiana, and
Chandeleur Area, OCS Blocks 27, 29 and 30. The contract acquisition price of
$20.0 million, plus a production payment of $1.0 million, was reduced to a
closing cost of $12.1 million, after adjustment for net revenue credits for the
period from the effective date to the closing date and for a cash deposit of
$1.0 million paid by the Company. Hoactzin paid all of the funds required at
closing, except for $0.1 million that was paid by the Company. The production
payment is to be paid from 25% of the revenue produced by the acquired property
interests once payout of the initial acquisition cost of $20.0 million has
occurred.

Hoactzin had previously provided funding in the amount of $4.9 million for the
acquisition of the High Island Block 196 property. Included in this amount was
$2.0 million that was deposited with Capco's surety company as collateral for
bonds that were posted with the Minerals Management Service. Hoactzin had also
advanced $1.5 million for the pending acquisition from the Company of working
interests in three wells in the Brazos Field and the well being drilling in the
OCS Galveston Block 297. The total proceeds of $6.4 million were reported by the
Company as a note payable for a portion of the year 2005 until Hoactzin received
owner approval from the Minerals Management Service and the Company assigned the
property interests to Hoactzin.

On November 30, 2005, Hoactzin closed on the acquisition of a producing oil
property located in Orange County, Texas. Hoactzin funded the total acquisition
cost of $2.8 million. The acquired property consists of approximately 550 acres
and includes 130 previously drilled wells, of which 20 were in current
production. As operator of the property, Capco intends to begin a program to
return idle wells to production.

The Agreement is governed under the terms of a Management Agreement between the
parties. Hoactzin owns title to the properties and retains all cash flow from
the properties until their investment, including a return of 8% on the invested
funds, is repaid ("Repayment Date"), at which time the Company will receive a
management fee equal to 66.7% of the net cash flow from the properties. The
Company has the option to purchase the property interests from Hoactzin at any
time after the one-year anniversary of the Repayment Date, and Hoactzin has the
option to sell its property interests to the Company at any time after the
two-year anniversary of the Repayment Date. The option prices are based on
formulas specified in the Management Agreement.

As of December 31, 2005, Hoactzin had expended a total of $21.2 million under
this Agreement. Interest earned on invested funds totaled $0.8 million, and
distributions of net cash flow to Hoactzin amounted to $11.4 million, resulting
in a remaining investment balance of $10.6 million.

                                      F-17


In connection with the acquisition of the Chandeleur Area properties, the
Company secured participation from two outside investors. Proceeds from these
investors totaling $0.7 million were used by Capco to fund a portion of the $1.1
million that the Company contributed to the total acquisition cost of these
properties, and were recorded as a reduction of the Company's basis in the
Agreement. For the consideration paid to Capco, the investors received a total
of 5.5% of Capco's rights and title to the Chandeleur Area properties. For an
initial period of twelve months, beginning July 1, 2005, the investors are
receiving distributions at the rate of $66,000 per month. At the end of that
period, the investors' accounts will be adjusted to reflect any difference
between the cash distributions paid during the period and actual cash flow from
the properties attributable to the 5.5% interest, with a settlement of funds
either due to, or from, the investors. In addition, effective July 1, 2006, the
investors will begin to receive payments equal to 5.5% of actual net cash flow
from the Chandeleur Area properties.

At the closing of the Agreement with Hoactzin, the Company issued a series of
common stock purchase warrants ("Warrants") to Hoactzin. The Warrants are
exercisable into a total of 24,226,181 shares of the Company's Common Stock at
initial exercise prices ranging from $0.176 to $0.30, subject to adjustments
pursuant to the anti-dilution provisions set forth in the Warrants, and expire
five (5) years from date of issue. The Warrants may be exercised upon payment of
cash, exchanged for the Company's Common Stock, or applied as a credit against
the Aggregate Investment Amount, as that term is defined in the agreements.
Using the Black-Scholes pricing model with a Common Stock price of $0.50, which
was the closing price on the grant date of the Warrants, it was determined that
the Warrants had a fair value of $10.8 million. This amount has been accounted
for as Cost of Financing Under Management Agreement for obtaining the management
fee as provided for in the Management Agreement, with a corresponding increase
to the Company's paid in capital account. The $2.0 million cash deposit with the
Company's surety company was allocated from this amount to be reported by the
Company with other similar cash deposits. Cash payments in the total amount of
$1.1 million contributed to the management agreement by the Company in
connection with the acquisition of the Chandeleur Area properties have also been
accounted for as Cost of Financing Under Management Agreement.

During the eight-month period from closing of the Agreement in May 2005 to
December 31, 2005, Hoactzin expended an additional $2.9 million, principally in
connection with an acquisition of a producing oil field in southeast Texas.
These expenditures resulted in a grant of 5,248,196 Warrants with a calculated
fair value, using the Black Scholes pricing model, of $0.9 million. This amount
has been accounted for as a Cost of Financing Under Management Agreement, with a
corresponding increase to the Company's paid in capital account. The Warrants
have an exercise price of $0.195, and expire five (5) years from date of issue.

The net cost of $10.1 million, including reduction for the proceeds received
from the two investors discussed above, will be carried on the Company's balance
sheet at cost, to be reduced by amortization once the venture has achieved
payout and management fee payments are initiated. The Company will periodically
assess the carrying value of the Cost of Financing Under Management Agreement
for possible impairment. In management's opinion, no impairment existed as of
December 31, 2005. In the event that the Company elects to exercise its option
to acquire property interests from Hoactzin (one year following Repayment Date),
the carrying value of the Cost of Financing Under Management Agreement will be
considered to be a cost of the acquisition and reclassified to the oil and gas
property full cost pool account.

The Company had the following acquisitions and divestments during 2004 and 2005:

ACQUISITIONS

Effective July 1, 2004, the Company purchased a 92.8% working interest in a
property located in Stephens County, Texas. In addition to the acreage, the
acquisition included one producing gas well drilled by the former owners, the
coal bed methane well drilled by the Company during the year and seismic and
geological studies. The Company issued 3.6 million shares of Common Stock as
consideration for the acquisition cost of $0.4 million. The per share price of
$0.16 approximated the market price of the Company's Common Stock at that time.
Approximately 70% of the acquired working interest in the property was acquired
as a result of Capco's exchange of shares for 100% equity ownership of Packard
Gas Company with individuals, or entities controlled by individuals, who have
either a direct, or beneficial, relationship to the Company, including Capco's
President of the Company. Subsequent to the exercise of its option, the Company
drilled and completed a gas well on the property at a cost of $0.2 million.
Following a period of evaluation of the two producing gas wells the decision was
made to discontinue further drilling activities on the property, and as a
result, the Company only earned acreage attributable to each well location
actually drilled on the property.

                                      F-18


In September 2004, the Company acquired from a Director of the Company, an 80%
equity interest in Bison Energy Company ("Bison"), an entity organized for the
purpose of owning, and operating, oil and gas properties in the state of
Wyoming. The Director holds the 20% minority interest. Bison's operations since
date of acquisition resulted in a loss of $23,000. The entire amount of the loss
has been reflected in the financial statements and no minority interest has been
calculated. Until such time as operations recover the deficiency in minority
interest of $4,600, Capco will report 100% of results of operations with no
reduction for minority interest. In conjunction with the equity investment, the
Director exercised options at a price of $0.0625 per share to acquire 800,000
shares of the Company's Common Stock. The option proceeds of $50,000 were
advanced to Bison to provide funding for the acquisition of a 33.33% working
interest in an oil property in the amount of $30,000; Bison retained the balance
for working capital. The property consists of 720 gross acres and includes nine
wells, four of which are currently in production. Rework operations are in
progress in an effort to restore the remaining wells to production.

OIL AND GAS PROPERTIES

On May 4, 2005, the Company closed on the sale of a portion of its working
interest in two producing wells and one idle well in the Brazos area to
Hoactzin. In addition, Hoactzin has the option to participate in work over
activities in a fourth well if such activities are conducted. Sales proceeds in
the amount of $0.5 million were credited against the Company's full cost pool.

In February 2005, the Company commenced drilling operations on an exploratory
well in Outer Continental Shelf ("OCS") Galveston Block 297. Capco was the
operator of the well, which was targeted for a total depth of 13,500 feet. If
successful the Company would own a 27% working interest in the well, with the
remaining interest owned by other oil and gas companies. Drilling activities
were significantly extended past the anticipated timeline as it became necessary
to sidetrack and re-drill a portion of the well due to encountering excessive
gas pressures at a depth of approximately 13,350 feet. The well was drilled to
its target depth and tested for the presence of hydrocarbons, but in the opinion
of management and the other participants, the test results did not warrant a
completion attempt, and the well was plugged and abandoned in May 2005. Capco
filed a claim with its insurance company for recovery of a portion of the
additional costs incurred during the drilling of the well, and received $3.2
million for its interest in November 2005. The Company's cost of drilling the
well, after reduction for insurance proceeds and turnkey payments received from
some of the participants in the well, were $2.8 million and are included in the
full cost pool.

The Company also incurred expenditures of $0.5 million in connection with the
development of properties located in Creek County, Oklahoma, satisfying the
terms of the purchase agreement to earn its entire 50% working interest in the
properties. During the year 2005, the Company had increased its ownership in the
properties from 45% to 50% by acquiring an additional 5% working interest from
another owner of the properties.

Additionally, the Company expended in excess of $0.1 million for development of
properties located in Osage County, Oklahoma, satisfying terms of the purchase
agreement for that property. The Company also disbursed a total of $14,000 to
the seller for the net profits obligation.

                                      F-19


Effective October 1, 2005, the Company executed a Funding Agreement
("Agreement") with Domain Development Partners I, LP ("Domain"), providing for
the development of idle wells in the Company's Brazos area. Under the terms of
the Agreement, Domain would provide funding to pay for the Company's portion of
costs to rework as many as fifteen idle wells in an attempt to restore the wells
to production. Domain's only recourse for repayment of the funds expended is the
revenue that results from such rework activities. Domain will receive 70% of
Capco's revenue interest in the wells until such time that it has received
reimbursement for 150% of its expended cost, at which time Domain's interest in
Capco's revenue will decrease to 35%. Following recovery of 200% of its expended
cost, Domain will cease to have an interest in the wells. In connection with
this transaction, Capco issued warrants to Domain to acquire, for a period of
two years, up to five million shares of Common Stock at a price of $0.175 per
share. Using the Black-Scholes method of valuation, the warrants have a fair
value of $0.5 million, which cost has been included in the Company's full cost
pool with a corresponding credit to paid in capital. As of December 31, 2005,
rework activities had commenced on two wells at a cost of approximately $0.2
million. Domain had advanced funds in the amount of $0.2 million to pay such
costs. The Company provided Domain with a security agreement covering the wells
for which it will be providing funding.

In February 2004, the Company closed on an acquisition of a production platform
with nine additional well in the Brazos Field, offshore in Matagorda County,
Texas. The Company owns a 90% working interest in the wells and will be operator
of the property. In conjunction with the acquisition, Capco plans to acquire
leases for the mineral interests at an estimated cost of $0.1 million. Such
expenditure is necessary before the Company can initiate production from any of
the acquired wells. Under the terms of the agreement, the seller agreed to
contribute as much as $1.0 million to apply toward payment of abandonment costs
when, and if, the Company incurs such costs. In accordance with FAS 141,
contingent consideration that is not recognized at the acquisition date is
recognized and measured when the contingency is resolved and consideration is
issued or becomes issuable. As of December 31, 2005, the Company has not
finalized its work program for this property, and had not expended any funds for
lease acquisition.

In February 2004, the Company entered into an agreement to drill and complete a
coal bed methane well in Stephens County, Texas. The well was drilled to a depth
of 1,100 feet at a cost of $0.1 million, and following a period of "dewatering"
and evaluation, was determined to be non-productive. By drilling the well Capco
earned the right to negotiate the purchase of a leasehold interest in
approximately 4,000 acres, along with wells previously drilled on the property.

In July 2004, the Company participated with a 15% working interest in the
acquisition of leases covering approximately 7,000 gross acres in a drilling
prospect located in Fayette County, Alabama. Two wells were drilled on the
property and both were determined to be incapable of commercial production. The
Company plans to further evaluate the undeveloped acreage to determine if
additional drilling is warranted. Capco incurred expenditures for lease
acquisition and drilling costs in the total amount of $0.2 million for it 15%
participation.

Effective September 30, 2004, the Company sold its interests in non-operated
producing properties located in Alabama and Louisiana to a company owned by the
Company's Chief Executive Officer. Sales proceeds in the amount of $0.4 million
were received by the Company in October 2004 and were used for working capital.
The sales proceeds were credited against the Company's basis in oil and gas
properties. No gain or loss was recognized from the sale as the disposition
represented only 3% of the Company's proved reserves at the time of sale. If it
is determined through due diligence by the Company that the properties could
have been sold for an amount greater than $0.4 million, then the related party
has the obligation to pay such excess to the Company, or the Company, at its
option, may repurchase the properties at the original sales price. There were no
changes in 2005 to the transaction as originally closed in 2004.

                                      F-20


In October 2004, the Company acquired a 45% working interest in two properties
located in Creek County, Oklahoma. The properties consisted of approximately 100
oil wells, the majority of which were not in production at the time of
acquisition by the Company. Under the terms of the purchase agreement the
Company is obligated to spend $0.6 million over a specified period of time in an
effort to bring injection and production wells back in to service to earn the
entire 45% interest. As of December 31, 2004, the Company had incurred $48,000
of such costs. During the year 2005, Capco increased its working interest
ownership from 45% to 50% by acquiring an additional 5% working interest from
another owner of the properties. The Company also incurred property development
expenditures of $0.5 million, satisfying the terms of the purchase agreement to
earn its entire 50% working interest in the properties.

In December 2004, the Company acquired a 100% working interest in an oil
property consisting of approximately 80 wells located in Osage County, Oklahoma.
The acquisition cost of $0.2 million is to be settled by the issuance of 1.0
million shares of the Company's Common Stock. The per share price of $0.20
approximated the market price of Capco's Common Stock at the time the agreement
was negotiated with the seller. The Common Stock was issued to the seller in
March 2005. The seller of the property retained a net profits interest in the
amount of $0.3 million that is to be paid from one-third of the net production
from the property until paid in full. The net profit distributions will be
included with the cost of the property as Capco pays them. In addition, the
purchase agreement stipulates that the Company expend a minimum of $0.1 million
of property development costs within one year from the date of acquisition.
Capco expended in excess of $0.1 million of such costs during the year 2005.

Effective December 31, 2004, the Company sold its interests in non-operated
producing properties located in Michigan and Montana and other assets to the
Company's Chief Executive Officer for the amount of $4.7 million. The Company
received a fairness opinion for the sale in January 2005. The sales amount was
settled by the payment of a cash deposit in the amount of $0.7 million,
assumption of debt against the properties in the amount $3.3 million and the
issuance of a note payable to the Company in the amount of $0.7 million. The
note was paid in full in March 2005. The disposition resulted in a significant
change to the depletion rate in Company's full cost pool cost center, which
required that gain or loss recognition be given to the sale. The Company
recorded a gain in the amount of $0.4 million from the sale.

LAND

In December 2004, the Company sold 160 acres of undeveloped land located in
Alberta, Canada. The Company had owned the land since 1999 with a cost basis of
$0.2 million. Consideration for the sale consisted of $0.1 million cash received
in December 2004, assumption by the buyer of related indebtedness in the amount
of $0.4 million and $0.3 million cash received in March 2005. The Company
realized a gain of $0.6 million from the sale. The buyer paid the note
receivable in full in March 2005.

3. INVESTMENTS IN EQUITY SECURITIES-MARKETABLE SECURITIES

During 2005, the Company invested on a short-term basis temporarily available
cash in marketable securities. As of December 31, 2005, the Company had disposed
of all such investments, realizing total losses in the amount of $9,000.

During 2004, the Company disposed of its portfolio of marketable securities in
common stock, realizing total losses in the amount of $65,000.

                                      F-21


4. OIL AND GAS PROPERTIES

Oil and gas properties consisted of the following as of December 31, 2005 (in
thousands):

      Properties being amortized               $ 17,357
      Properties not subject to amortization        168
      Accumulated depreciation and depletion     (2,902)
                                               --------
      Oil and gas properties, net              $ 14,623
                                               ========

At December 31, 2005, certain of these assets collateralized a portion of the
Company's long-term debt (see Notes 6 and 7), as well as the Company's
obligation to a surety company.

Depreciation and depletion expense totaled $1.3 million and $0.8 million for
2005 and 2004, respectively.

5. BUSINESSES UNDER CONTRACT FOR SALE

Effective December 31, 2002, the Company entered into an agreement to sell two
subsidiaries whose assets consisted principally of land, buildings and
equipment. The subsidiaries were in the business of distribution of refined
petroleum products and convenience stores.

Capco agreed to continue to operate the businesses for a period of time
subsequent to the date of sale to allow the buyer time to make separate credit
arrangements with lenders and suppliers, and to negotiate for the removal of the
Company as the guarantor of a significant portion of the indebtedness assumed by
the buyer. Approximately $3.8 million of indebtedness was owed to one lender by
one of the subsidiaries, and the subsidiary was in default on the indebtedness.
The sales transaction resulted in a gain to the Company in the amount of $0.2
million; however, due to the significant risk still assumed by the Company in
the form of the loan guarantees, the gain was to be deferred until such time
that the risk either was significantly reduced or eliminated.

During the period 2003 to 2005, there were several attempts to achieve a
renegotiation of the indebtedness, all without success. Some of the underlying
property was sold with the proceeds applied to the indebtedness, but Capco's
guarantee remained in place.

The Company evaluated the exposure relating to the debt guarantees as of
December 31, 2003, and determined that the Company would, in all likelihood,
incur a loss from this disposal. It was estimated that the liabilities, which
are guaranteed by the Company, exceeded the underlying net assets by
approximately $0.3 million. The Company accounted for this deficit by
eliminating the deferred gain of $0.2 million recorded in 2002, and by recording
a $0.2 million charge in 2003.

In October 2005, the parties achieved a restructuring of the indebtedness that
provided for the removal of Capco's debt guarantee, although Capco is a party to
an indemnification agreement that survived the settlement. Pursuant to the terms
of the indemnification agreement, Capco's liability for the items covered by the
indemnification is limited to $0.3 million. For its part in the restructuring
Capco agreed to fund a total of $0.3 million to be applied to the outstanding
indebtedness. Of this amount, $0.2 million was paid in December 2005, and $0.1
million was paid in January 2006. Capco also granted 1,915,344 warrants to
Hoactzin as consideration for its participation in the refinancing of the
indebtedness. Using the Black-Scholes pricing model, the warrants had a fair
value of $0.3 million. This cost has been charged to operations by Capco, with a
corresponding increase to paid in capital. The warrants are exercisable for a
period of five years with an exercise price of $0.195 per share.

                                      F-22


6. LONG TERM DEBT

Long-term debt consisted of the following as of December 31, 2005 (in
thousands):

Note payable, interest at 8% per annum, payable in
one installment of $80 and ten monthly installments
of $10, which includes principal and interest, to
November 2005, collateralized by oil and gas leases           $  17

Note payable to a related party, interest at 7%, payable
in monthly installments of $4, due on June 30, 2006              77

Note payable to an individual, interest at 12.0%,
payable in monthly installments of $75, which includes
principal and interest, due in June 2006,
collateralized by producing oil and gas properties and
by the guarantee of the Company's Chief Executive Officer       455

Notes payable for equipment and oilfield services, interest
ranging from 3.5% to 9.5%, payable in total monthly
installments of $8, due at various times to December 2009,
collateralized by equipment                                     182
                                                              -----
Total debt                                                      731
Less current maturities                                        (633)
                                                              -----
Long term debt                                                $  98
                                                              =====

The following is a summary of the principal amounts payable over the next four
years (in thousands):

                   Year ending December 31,
                             2006             $633
                             2007               83
                             2008                7
                             2009                8
                                              ----
                                              $731
                                              ====

Interest expense for all corporate borrowings totaled $0.4 million and $0.4
million for the years ended December 31, 2005 and 2004, respectively.

7. CONVERTIBLE PROMISSORY NOTES

                                      F-23


Convertible promissory notes consisted of the following as of December 31, 2005
(in thousands):

Note payable to an individual, interest at 9%,
plus an incremental interest rate of 1% for every $1
that West Texas  Intermediate Crude exceeds $21
per barrel payable quarterly, convertible into
common stock at the option of the holder at
$0.38 per share, with the past due unpaid
principal as of May 2003, no collateral                                 $ 25

Notes payable to individuals, interest at 12%,
payable quarterly, convertible into common stock
at the option of the holders at $0.20 per share,
with the unpaid principal due during February to May
2007 (net of unamortized discounts of $12), no collateral                243

Note payable to an individual, interest at 10%,
payable quarterly, convertible into Common
Stock at the option of the holder at $0.18 per share,
with the unpaid principal due in September 2008
(net of unamortized discount of $47),
collateralized by oil and gas properties                               1,653

Note payable to an individual, interest at 12%,
payable quarterly, convertible into common
stock at the option of the holder at $0.15 per share,
with the unpaid principal due in September 2008, no collateral          150
                                                                      -----
                                                                      $2,071
Less current maturities                                                  (25)
                                                                      -----
                                                                      $2,046
                                                                      =====

At the option of the holders, the notes can be converted into as many as 11.8
million shares of the Company's Common Stock. Notes not converted during the
three-year period from date of sale are to be redeemed for their face amount on
the third anniversary from the subscription date. Pursuant to EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios", discounts of approximately $0.1
million attributable to the beneficial conversion feature were recorded as
additional paid in capital. The discounts are being amortized using the
effective interest rate method over the terms of the indebtedness.

8. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following at December 31, 2005 (in
thousands):

Minority interest in former consolidated subsidiary   $  361

Production payable                                       150

Vendor payable in dispute                                879

Deferred income taxes                                     27
                                                      ------
                                                      $1,417
                                                      ======

9. COMMITMENTS AND CONTINGENCIES

ENVIRONMENT

Capco, as owner and operator of oil and gas properties, is subject to various
federal, state, and local laws and regulations relating to discharge of
materials into, and protection of, the environment. These laws and regulations
may, among other things, impose liability on the owner of real property and the
lessee under oil and gas leases for the cost of pollution clean-up resulting
from operations, subject the owner/lessee to liability for pollution damages and
impose restrictions on the injection of liquids into subsurface strata.

                                      F-24


Although Company environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and increasing
stringent regulations could require the Company to make additional unforeseen
environmental expenditures

The Company maintains insurance coverage that it believes is customary in the
industry, although it is not fully insured against all environmental risks.

The Company is not aware of any environmental claims existing as of December 31,
2005, that would have a material impact on its consolidated financial position
or results of operations. There can be no assurance, however, that current
regulatory requirements will not change, or past non-compliance with
environmental laws will not be discovered on the Company's property.

LAND RENTALS AND OPERATING LEASES

The Company leases office facilities and equipment under operating leases
expiring through March 31, 2007. As of December 31, 2005, future minimum rental
payments required under operating leases are as follows (in thousands):

                   Year ending December 31,
                              2006               $74
                              2007                 2
                                                 ---
                                                 $76
                                                 ===

Rental expense charged to operations totaled $0.1 million and $64,000 for the
years ended December 31, 2005 and 2004, respectively.

LEGAL PROCEEDINGS

The Company is a party to certain litigation that has arisen in the normal
course of its business and that of its subsidiaries. A company engaged by Capco
to provide well service in connection with work over operations on some of the
Company's offshore wells has filed a claim for unpaid invoices in the amount of
approximately $0.2 million. Capco has recorded less than $50,000 of such costs
in its accounts, and has claims against the service company for damages and
costs to its wells in an estimated amount in excess of $1.0 million. The Company
expects to show that its damages far exceed the claim amount asserted by the
service company.

In a matter styled Harvest Oil & Gas, LLC v Capco Energy, Inc. filed in United
States District Court, Eastern District of Louisiana on August 16, 2005, the
claimant seeks collection of a $0.6 million finders fee on a transaction where
title to oil and gas properties was initially taken by Capco, but then
immediately transferred to the Hoactzin investment program. A trial date of
January 22, 2007, has been set to hear the mater. The Company has not recorded
any loss provision for this matter as it believes the complaint to be without
merit, but in the event that the plaintiff is successful in obtaining a
favorable result against the Company, Capco plans to seek reimbursement from the
Hoactzin investment program.

OTHER

Capco is obligated to a surety company to make monthly cash collateral deposits
of $24,000 over a period of thirteen months, ending February 2007.


                                      F-25


Various oil and gas property purchase agreements require that funding
obligations of $1.1 million and $0.3 million be paid from the net profits, if
any, derived from the respective operations of the properties. A total of
$14,000 was paid in 2005 against the $0.3 million obligation.

Capco is guarantor of certain obligations of business interests that Capco sold
during 2003 of $1.3 million at December 31, 2005. The obligations consist of
vendor trade accounts, and real estate and equipment purchases and leases.
Management believes that there is sufficient underlying collateral value in the
related assets to significantly reduce the potential loss, if any, to Capco.
Subsequent to December 31, 2005, the business interests effected significant
reductions to the outstanding indebtedness, such that as of April 30, 2006, the
amount subject to Capco's guarantee was $0.2 million.

Capco has provided an indemnification in an amount not to exceed $250,000 to a
party that formerly was the holder of indebtedness of which Capco was a
guarantor.

10. EQUITY

COMMON STOCK

During 2005, Capco had the following significant equity transactions:

Capco issued 125,000 shares of Common Stock upon the exercise of options,
realizing proceeds of $22,000.

Capco issued 1,074,286 shares of Common Stock to settle $213,000 in prior year
liabilities. Included in these amounts were 1.0 million shares issued in
settlement of an obligation for the acquisition of a property for $200,000.

Capco issued 925,715 shares of Common Stock under its 1999 Incentive Option Plan
for compensation valued at $162,000, which had been reported as a liability as
of the end of 2004.

Capco issued 300,000 shares of Common Stock upon the election by holders of
convertible promissory notes of $45,000, to convert the notes into Common Stock.

Capco sold 1.0 million shares of Common Stock to an individual for $175,000.

On March 10, 2005, Capco sold 10 million shares of Common Stock for $3.0 million
in a private placement. No underwriter discounts or commissions were paid.

On May 10, 2005, Capco sold 4 million shares of Common Stock for $1.2 million in
a private placement. No underwriter discounts or commissions were paid.

On June 15, 2005, Capco increased the number of shares authorized from
150,000,000 to 500,000,000 shares.

During 2004, Capco had the following significant equity transactions:

Capco issued 300,000 shares of Common Stock in settlement of a $30,000 liability
which represented the fair market value of the Common Stock when both parties
agreed to the settlement.

Capco issued 1,095,000 shares of Common Stock upon the exercise of options,
realizing proceeds of $70,500.

Capco issued 3,644,760 shares of Common Stock for the acquisition of an oil and
gas property for $437,000, which represented the fair market value of the Common
Stock when the acquisition closed.

TREASURY STOCK

In 2005, Capco repurchased 1.2 million shares of Common Stock for $205,740.

In 2004, Capco repurchased 60,600 shares of Common Stock for $11,000.

                                      F-26


STOCK OPTIONS

Capco has a Stock Option Plan providing for the issuance of incentive stock
options and non-qualified stock options to Capco's key employees.

Incentive stock options may be granted at prices not less than 100% of the fair
market value at the date of the grant. Non-qualified stock options may be
granted at prices not less than 75% of the fair market value at the date of the
grant.

No compensation cost was recognized for stock option grants in 2005 and 2004.
The options were granted with maximum terms between one and five years.

A summary of the status of the Company's stock option plan as of December 31,
2005 and 2004 is presented below:

                                    2005                  2004
                          ----------------------  -------------------
                                        Weighted               Weighted
                                        average                average
                                        exercise               exercise
                             Shares      price      Shares      price
                          ----------- ----------  ----------    -----
Outstanding
 at beginning of year      16,000,000 $     0.14  15,880,000    $0.13
Granted at less than
 market                     1,000,000 $     0.18          --       --
Granted at market           1,300,000 $     0.22   1,700,000    $0.18
Exercised                     (25,000)$     0.06  (1,080,000)   $0.06
Canceled                           --         --    (500,000)   $0.20
Forfeited                          --         --          --       --
                          ----------- ----------  ----------    -----
Outstanding at end
 of year                   18,275,000 $     0.14  16,000,000    $0.14
                          =========== ==========  ==========    =====
Options exercisable
 at end of year            18,275,000 $     0.14  16,000,000    $0.14
                          =========== ==========  ==========    =====

                  Options Outstanding                       Options Exercisable
- --------------------------------------------------------   ---------------------
                                    Weighted
                                     average    Weighted                Weighted
 Year      Range of      Number     remaining    average                 average
options    exercise     outstand-  contractual  exercise     Number     exercise
granted    prices          ing        life       price     exercisable   price
- -------    --------     ---------  -----------  --------   -----------  --------
 2003   $0.06 to $0.25  14,775,000   2.16 years    $0.13    14,775,000     $0.13
 2004       $0.17        1,200,000   3.75 years    $0.18     1,200,000     $0.18
 2005   $0.17 to $0.22   2,300,000   3.58 years    $0.20     2,300,000     $0.20
                        ----------                          ----------
        $0.06 to $0.25  18,275,000   2.44 years    $0.14    18,275,000     $0.14

Non-employee options

Capco did not issue stock options to any non-employee during 2005 and 2004.

In January 2003, options to acquire 600,000 shares of the Company's Common Stock
at an exercise price of $0.20 were granted to an individual for market
consulting services. Options to acquire 200,000 shares were exercised during
2005, and 15,000 options were exercised during 2004, leaving a balance of
unexercised options of 385,000 at December 31, 2005. The unexercised options
expired in January 2006.

                                      F-27


OTHER DILUTIVE SECURITIES

In addition to the options discussed above, Capco has outstanding other dilutive
securities. A summary of such securities follows:

                                                       Weighted
                          Range of      Underlying      average        Weighted
                         conversion/     shares of     remaining        average
                          exercise        Common      contractual      exercise
Issue                      prices         Stock          life            prices

Convertible promissory
 Notes                  $0.15-$0.375     11,878,438     2.57 years           --

Warrants granted with
 private placement of
 Common Stock              $0.45          7,000,000     4.26 years        $0.45

Warrants granted with
 financing agreement    $0.176-$0.30     31,389,721     3.94 years        $0.24

Warrants granted with
 consulting agreements  $0.175-$0.27      7,000,000     2.23 years        $0.20

11. INCOME TAXES

Following is a reconciliation of the Federal statutory rate to the effective
income tax rate for 2005 and 2004:

                                               2005                   2004
                                               ----                   ----
Federal income tax rate                       (34.0)%                 34.0%
State income taxes, net of
  federal benefit                              (6.0)%                  6.0%
Utilization of NOL carry forward                 --                     --
Effect of valuation allowance                  40.0%                 (40.0)%
                                               ----                   ----
Effective income tax rate                       0.0%                   0.0%
                                               ====                   ====

At December 31, 2005, Capco had net operating loss carry forwards of
approximately $9.6 million, which expire at various dates through the year 2021.

Deferred tax assets and liabilities reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of Capco's deferred tax assets and liabilities are as follows at
December 31 (in thousands):

                                      F-28


                                           2005       2004
                                         -------    -------
Deferred tax assets:
Marketable securities, receivables and
  liabilities                            $    27    $    27
Loss carry forward                         3,837      2,871
Less: valuation allowance                 (2,668)    (1,047)
                                         -------    -------
                                         $ 1,196    $ 1,851
                                         =======    =======

Deferred tax liability:
Property and equipment and investments   $ 1,196    $ 1,851
                                         =======    =======

The non-current portions of the deferred tax asset and the deferred tax
liability accounts offset each other in the Company's consolidated balance
sheet.

12. RELATED PARTY TRANSACTIONS

Year Ended December 31, 2005

Capco had several transactions with Sedco, Inc. and Meteor Enterprises, Inc.,
private companies controlled by CEO Ilyas Chaudhary ("affiliates"). The Company
paid expenses in the amount of $28,000 in behalf of affiliates, and was charged
a total of $8,000 for expenditures made by affiliates in behalf of the Company.
The Company accrued compensation expense in the amount of $435,000 due to
affiliates in accordance with the Chief Executive Officer's employment. Included
in this amount is the $108,000 that was reported as prepaid compensation at the
end of year 2004. The Company made net cash advances in the amount of $258,000
to affiliates that included payment of accrued compensation and settlement of
expenditures made by the respective parties during the year in behalf of each
other. At December 31, 2005, the amount of $49,000 was due to affiliates.

In October 2005, a private company owned by Capco's CEO achieved a restructuring
of indebtedness that provided for the removal of Capco's debt guarantee,
although Capco is a party to an indemnification agreement that survived the
settlement. Pursuant to the terms of the indemnification agreement, Capco's
liability for the items covered by the indemnification is limited to $0.3
million. For its part in the restructuring Capco agreed to fund a total of $0.3
million to be applied to the outstanding indebtedness. Of this amount, $0.2
million was paid in December 2005, and $0.1 million was paid in January 2006.
Capco also granted 1.8 million warrants to Hoactzin as consideration for its
participation in the refinancing of the indebtedness. Using the Black-Scholes
pricing model, the warrants were determined to have a fair value of $0.3
million. This cost has been charged to operations by Capco, with a corresponding
increase to paid in capital. The warrants are exercisable for a period of five
years with an exercise price of $0.195 per share.

Effective April 1, 2005, the Company divested its 80% equity interest in Bison
Energy Company that was acquired from a Director of the Company during 2004 by
selling the interest to the Director for the Company's original investment.
Funding provided to Bison by Capco in 2004 of $50,000 that had previously been
accounted for as an advance to Bison was reclassified as a payment against
long-term debt owed to the Director. The Company incurred interest expense of
$7,000 on the indebtedness in 2005.

Year Ended December 31, 2004

The Company had several transactions with its Chief Executive Officer, Ilyas
Chaudhary, and Sedco, Inc. and Meteor Enterprises, Inc., private companies
controlled by Mr. Chaudhary ("affiliates"). The Company received cash advances
in the total amount of $350,000 from affiliates. The Company paid expenses in
the amount of $93,000 in behalf of affiliates, and was charged a total of
$67,000 for expenditures made by affiliates in behalf of the Company. The
Company accrued, and paid, compensation expense in the amount of $175,000 due to
affiliates in accordance with the Chief Executive Officer's employment. The
Company made cash advances in the total amount of $766,000 to affiliates that
included repayment of the balance in the amount of $159,000 owed to affiliates
at the beginning of the year, repayment of cash advances received during the
year and settlement of expenditures made by the respective parties during the
year in behalf of each other. Of such advances, $108,000 was considered to be
advance payments of Mr. Chaudhary's compensation for the year 2005, and has been
reclassified as a prepaid expense in the accompanying financial statements as of
December 31, 2004. No amount was due to, or due from, affiliates at December 31,
2004, except as discussed below.

                                      F-29


Effective September 30, 2004, the Company sold its interests in non-operated
producing properties located in Alabama and Louisiana to a company owned by the
Company's Chief Executive Officer. Sales proceeds of $0.4 million were received
in October 2004. If it is determined through due diligence by the Company that
the properties could have been sold for an amount greater than $0.4 million,
then the related party has the obligation to pay such excess to the Company, or
the Company, at its option, may repurchase the properties at the original sales
price. There were no changes in 2005 to the transaction as originally closed in
2004.

In September 2004, the Company acquired from a Director an 80% equity interest
in a start-up company formed for the purpose of acquiring producing oil and gas
properties. Subsequent to the incorporation of the company, Capco advanced
$50,000 to provide funding for the cost of an acquisition and for working
capital.

In October 2004, the Company purchased a property for 3.6 million shares valued
at $576,000. The per share price of $0.16 approximated the market price of the
Company's Common Stock at that time. Approximately 70% of the acquired working
interest in the property was acquired as a result of Capco's exchange of shares
for 100% equity ownership of Packard Gas Company with individuals, or entities
controlled by individuals, who have either a direct, or beneficial, relationship
to the Company, including Capco's President. The negotiated acquisition price
was determined in amounts prorata to all members of the selling group.

Effective December 31, 2004, the Company sold its interests in non-operated
producing properties located in Michigan and Montana and other assets to Capco's
Chief Executive Officer for $4.7 million. The Company received a fairness
opinion for the sale in January 2005. The sales amount was settled by the
receipt of $0.7 million cash in December, assumption of debt against the
properties in the amount of $3.3 million and receipt of $0.7 million in March
2005.

Capco incurred interest expense in the amount of $11,000 on a note payable to a
Director that was outstanding during 2004.

13. PROFIT SHARING PLAN

The Company maintains a 401(k) Plan covering all eligible employees. Profit
sharing contributions are made (i) at the discretion of the Board of Directors;
and (ii) on the employee's behalf from salary deferrals. Eligible employees may
contribute on a pre-tax basis up to 100% of their qualifying annual
compensation, to a maximum of $40,000. Employer discretionary contributions are
not to exceed 50% of the first six percent of each employee's compensation.
Capco did not incur any expense for employer matching contributions for either
of 2005 and 2004.

14. MAJOR CUSTOMERS

During 2005, the Company had sales to two customers that accounted for
approximately 73.6% and 24.9%, respectively, of total oil and gas sales. Five
customers accounted for 22.7%, 21.6%, 12.9%, 12.7% and 10.4%, respectively, of
accounts receivable as of December 31, 2005.

During 2004, Capco had sales to two customers that accounted for approximately
52.3% and 33.0%, respectively, of total oil and gas sales. One customer
accounted for 49.6% of accounts receivable as of December 31, 2004.

                                      F-30


15. SUBSEQUENT EVENTS

Om March 2, 2006, Nabors Offshore Corporation filed a lawsuit against Capco and
a subsidiary seeking recovery of $0.9 million for unpaid drilling rig service
invoices for a well drilled by the Company during the year 2005. Capco disputes
this claim and in turn has filed a counterclaim of $1.3 million for recovery of
excess cost resulting from the actions of Nabors and reimbursement for fuel cost
that was charged to Capco. No trial date has yet been set for this matter.

On June 2, 2006, Capco agreed to purchase oil and gas properties located in
Federal waters in the Gulf of Mexico for $83 million. An acquisition deposit in
the amount of $8.3 million was provided by Hoactzin, which increased their
investment amount. Closing of the acquisition is scheduled for a date no later
than August 31, 2006. The Company plans to obtain the balance of the necessary
funding from either commercial lenders or industry partners.

As of December 31, 2005, the remaining investment amount to be recovered by
Hoactzin, exclusive of future interest accruals, was $10.6 million. For the
period from January 1, 2006, to June 16, 2006, Hoactzin made expenditures in the
amount of $9.3 million, which included the $8.3 million discussed above, posted
interest accruals of $0.2 million and received distributions in the total amount
of $8.6 million. There remained $11.5 million to be recovered to achieve payout,
which would result in the activation of Capco's management fee equivalent to
two-thirds of the venture's net cash flow.

Effective June 30, 2006, the Company sold its membership interests in Capco
Marine LLC and Midway Sunset LLC to an entity managed by a shareholder of the
Company. Total consideration of $1.5 million consisted of $0.3 million cash, the
assumption of Company liabilities of $0.2 million, and a note receivable of $1.0
million. The note bears interest at the rate of 10% per annum and matures for
payment on September 30, 2006, with an option to extend the maturity date to
November 30, 2006.

16. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

Capco's independent engineers, Ryder Scott Company and Pressler Petroleum
Consultants, Inc., prepared reserve estimates for the year-end reports for 2005
and 2004, respectively. Management cautions that there are many inherent
uncertainties in estimating proved reserve quantities and related revenues and
expenses, and in projecting future production rates and the timing and amount of
development expenditures. Accordingly, these estimates will change, as future
information becomes available.

Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions.

Proved developed reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods.

The Company's proved reserves at December 31, 2005 changed significantly from
the reported quantities at December 31, 2004. Oil reserves decreased 277,000
barrels due to revisions of previous estimates by our independent engineers.
Based primarily on operating performance during the year 2005, the estimates of
remaining proved oil reserves for the Company's SUDS West property in Creek
County, Oklahoma, and Caplen Field in Galveston County, Texas were revised
downward by 221,500 and 105,500 barrels of oil, respectively. The estimate of
remaining proved oil reserves for the Company's Bandwheel property in Osage
County, Oklahoma was increased by 46,400 barrels of oil. Revisions of estimates
of remaining proved gas reserves accounted for an increase of 2.5 mmcf of gas,
all of which was attributable to the Company's Brazos property located in
offshore Matagorda County, Texas. Based on current year production and the
initial results of the rework program which began in the fourth quarter of year
2005, including extensive geological study and log analysis, the independent
engineers determined that the estimate of remaining proved gas reserves had
increased from the end of the prior year.

                                      F-31


Capco had a significant decline in reserves in 2004 attributable to its
producing properties located in onshore and offshore Texas. Downward revisions
to the Caplen Field located in Galveston County, Texas totaled 151,427 barrels
of oil and 240,085 mcf of gas. Production in the year 2004 was significantly
curtailed due to field operational problems. Wells, which were shut-in for an
extended period during the year 2004, and remained shut-in at year-end, were
reclassified to proved developed non-producing status. Proved developed gas
reserves decreased from 317,506 mcf to 33,336 mcf. Approximately 55% of the
decrease was due to the elimination of one well as it was determined during the
year 2004 that the reservoir was depleted. Proved undeveloped oil reserves
decreased from 210,020 barrels to 78,863 barrels due to the elimination of one
location and per well reductions based on the incumbent engineer's evaluation of
the locations. Proved reserves attributed to the Brazos Field located in
offshore Matagorda County, Texas were revised downward in the amounts of 50,877
barrels of oil and 7,351,615 mcf of gas. Work-over activities were conducted on
five wells during the year in an attempt to either increase production rates or
restore wells to service. Such activities were successful on only one well. As a
result the incumbent engineer significantly reduced the previously reported
proved reserves until such time that it can be demonstrated that the wells are
capable of producing at economical levels. The changes reflect the engineers'
subjective evaluation of the properties based on a number of factors including
data that was available when the evaluation was prepared, actual production
during the current year and price changes. Properties sold by the Company during
the year 2004 resulted in additional decreases of 190,400 barrels of oil and
6,262,000 mcf of gas. Properties acquired during the year 2004 resulted in an
increase to proved reserves of 240,200 barrels of oil and 83,000 mcf of gas,
while year 2004 production resulted in a decrease of proved reserves of 22,100
barrels of oil and 727,000 mcf of gas.

ANALYSIS OF CHANGES IN PROVED RESERVES

Estimated quantities of proved reserves and proved developed reserves of crude
oil and natural gas, all of which are located within the United States, as well
as changes in proved reserves during the past two years are indicated below:

                                                Oil (Bbls)  Natural Gas (MCF)
                                               -----------  ----------------

Proved reserves at December 31, 2003               561,215     17,614,263
Purchases of minerals in place                     240,212         83,231
Extensions and discoveries                              --             --
Sales of minerals in place                        (190,355)    (6,262,191)
Production                                         (22,087)      (727,336)
Revisions of previous estimates                   (202,305)    (7,591,696)
                                               -----------    -----------
Proved reserves at December 31, 2004               386,680      3,116,271
Purchases of minerals in place                      42,750             --
Extensions and discoveries                              --             --
Sales of minerals in place                          (1,313)      (454,182)
Production                                         (12,620)      (293,199)
Revisions of previous estimates                   (277,032)     2,497,007
                                               -----------    -----------
Proved reserves at December 31, 2005               138,465      4,865,897
                                               ===========    ===========
Proved developed reserves, December 31, 2005        95,715      4,865,897
                                               ===========    ===========

                                      F-32


There are no reserves attributable to partnership or minority interests at
December 31, 2005.

The Company incurred the following capitalized costs related to oil and gas
activities during the year ended December 31, 2005 (in thousands):

      Properties being amortized               $6,601
      Properties not subject to amortization       --
                                               ------
                                               $6,601
                                               ======

OIL AND GAS OPERATIONS

Depletion, depreciation and accretion per equivalent unit of production for the
years ended December 31, 2005 and 2004, was $20.53 and $5.55, respectively.

Costs incurred by the Company during the year 2005 for acquisition, exploration
and development activities are as follows (in thousands):

      Acquisition of producing properties   $   --
      Exploration and development            6,601
                                            ------
                                            $6,601
                                            ======

STANDARDIZED MEASURE OF DISCOUNTED NET CASH FLOWS AND CHANGES THEREIN

The following information at December 31, 2005, and for the years ended December
31, 2005 and 2004, sets forth standardized measures of the discounted future net
cash flows attributable to the Company's proved oil and gas reserves.

Future cash inflows were computed by applying year-end prices of oil and gas
(with consideration of price changes only to the extent provided by contractual
arrangements) and using the estimated future expenditures to be incurred in
developing and producing the proved reserves, assuming continuation of existing
economic conditions.

Future income tax expenses were computed by applying statutory income tax rates
to the difference between pretax net cash flows relating to the Company's proven
oil and gas reserves and the tax basis of proved oil and gas properties and
available operating loss and excess statutory depletion carryovers reduced by
investment tax credits. Discounting the annual net cash flows at 10% illustrates
the impact of timing on these future cash flows.

The following table presents the standardized measure of discounted net cash
flows at December 31, 2005 (in thousands):

Future cash inflows                  $ 44,160
Future cash outflows:
Production costs                      (15,732)
Development costs (1)                  (3,742)
                                     --------
Future net cash flows before
 future income taxes                   24,686

Future income taxes                    (4,465)
                                     --------
Future net cash flows                  20,221

Adjustment to discount future
 annual net cash flows at 10%          (7,087)
                                     --------
Standardized measure of discounted
 future net cash flows               $ 13,134
                                     ========

(1) Includes estimated expenditures in each of the next three years to develop
proved undeveloped reserves as follows (in thousands): $1,583 (2006), $-0-
(2007), and $-0- (2008).

                                      F-33


The following tables summarize the principal factors comprising the changes in
the standardized measures of discounted net cash flows during the years 2005 and
2004 (in thousands):

                                           2005        2004
                                         --------    --------
Standardized measure, beginning of
 period                                  $  9,565    $ 32,442
Sales of oil and gas, net of
 production costs                            (771)     (2,264)
Net change in sales prices, net of
 production costs                          (1,804)      9,279
Changes in estimated future
 development costs                          3,565      (1,658)
Purchases of minerals in place                661       2,956
Sales of minerals in place                 (1,704)    (11,841)
Revisions of quantity estimates             2,402     (30,488)
Accretion of discount                         956       3,244
Other, including changes in production
 rates (timing)                                51      (2,845)
Change in income taxes                        213      10,740
                                         --------    --------
Standardized measure, end of period      $ 13,134    $  9,565
                                         ========    ========

                                      F-34


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

      Dismissal of Independent Registered Public Accounting Firm

On October 7, 2005, Stonefield Josephson, Inc. was terminated as our independent
accountants. Stonefield Josephson, Inc.'s report on our financial statements for
the year ended December 31, 2004, contained no adverse opinion or disclaimer of
opinion nor was it qualified as to audit scope or accounting principles.
Stonefield Josephson Inc.'s report on our financial statements for the year
ended December 31, 2003, included an explanatory paragraph expressing
substantial doubt about our ability to continue as a going concern.

Our Audit Committee made the decision to terminate our prior accountants to
utilize the services of a firm local to our primary business activities.

In connection with the prior audits for the years ended December 31, 2004 and
2003, and during the interim period from January 1, 2005, to October 7, 2005,
there have been no disagreements with Stonefield Josephson, Inc. on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure.

      Engagement of New Independent Registered Public Accounting Firm

On October 10, 2005, we engaged Malone & Bailey, PC as our independent
accountants. We did not consult with Malone & Bailey, PC with regard to any
matter concerning the application of accounting principles to any specific
transactions, either completed or proposed, or the type of audit opinion that
might be rendered with respect to our financial statements.

ITEM 8A.  CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in
Sections 13a-14(c) of the Securities Exchange Act of 1934) as of the end of the
period reported in this annual report (the "Evaluation Date"), concluded that
our disclosure controls and procedures were not effective and designed to ensure
that material information relating to us and our consolidated subsidiaries is
accumulated and would be made known to them by others within those entities as
appropriate to allow timely decisions regarding required disclosures. The
Company's conclusion that it's disclosure controls and procedures were not
effective is primarily due to the Company not having filed it's quarterly and
annual reports on a timely basis since the first quarter of 2005. Additionally,
as part of the Company's annual audit of the 2005 financial statements, Malone &
Bailey, PC identified adjustments relating to the Company's accounting for the
issuance of warrants. These adjustments have been recorded in the Company's
Annual Report on Form 10-KSB as of December 31, 2005.

(b) Changes in internal controls

We do not believe that there are significant deficiencies in the design or
operation of our internal controls that could adversely affect our ability to
record, process, summarize and report financial data. Although there were no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the Evaluation Date, our
senior management, in conjunction with our Board of Directors, continuously
reviews overall Company policies and improves documentation of important
financial reporting and internal control matters. We are committed to
continuously improving the state of our internal controls, corporate governance
and financial reporting.


                                       22


(c) Limitations on the effectiveness of controls

Our management, including the Chief Executive Officer and the Chief Financial
Officer, does not expect that our disclosure or internal controls will prevent
all errors or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.


                                    PART III

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth the name and age of each Director,
indicating all positions and offices presently held with us, and their
respective terms of service as a Director:

NAME:                       POSITIONS:                       PERIOD SERVED:
Ilyas Chaudhary          Director, President              November 18, 1999
                                                            to Present
Irwin Kaufman            Director                         November 18, 1999
                                                            to Present
William J. Hickey        Director, Secretary              November 18, 1999
                                                            to Present
Paul L. Hayes            Director                         July 19, 2000
                                                            to Present

      Below are the names of all Directors and the principal occupations and
employment of such persons during at least the last three years:

ILYAS CHAUDHARY - Mr. Chaudhary, 58, has been President and Director of the
Company since November 1999. He also served as CFO during the period May 2003 to
June 2005. He was an officer and a director of Saba Petroleum Company, an oil
and gas company from 1985 until 1998. Mr. Chaudhary has 27 years of experience
in various capacities in the oil and gas industry, including eight years of
employment with Schlumberger Well Services from 1972 to 1979. Mr. Chaudhary
received a Bachelor of Science degree in Electrical Engineering from the
University of Alberta, Canada.


                                       23


IRWIN KAUFMAN - Mr. Kaufman, 69, has been a director of the Company since
November 1999. Mr. Kaufman spent more than 30 years in the public sector. He
culminated his career as the executive in charge of computer operations for the
New York City public schools. With a budget of more than $50 million dollars,
Mr. Kaufman implemented a plan to upgrade system wide computer operations. He
has been a consultant with the Soros Foundation for several programs in the
Baltic States, Ukraine and Russia. Mr. Kaufman served on the board of directors
of Meteor Industries, Inc. and is presently a financial and educational
consultant.

WILLIAM J. HICKEY - Mr. Hickey, 69, has been a director since November 1999, and
Secretary since December 2001. Prior to joining the Company, he was a director,
secretary, and legal advisor to Saba Petroleum. Earlier, he was a Vice
President, and General Counsel to Litton Industries Inc. and Consolidated
Freightways, Inc. In addition, he has been a Division Legal Counsel with General
Electric Company. Mr. Hickey received his Doctorate in Law from Cornell
University and attended the Harvard Business School's Executive Management
Program.

PAUL L. HAYES - Mr. Hayes, 69, has been a director since July 2000. He has over
twenty years experience in the securities industry. He has been an investment
banker, analyst and research director. His undergraduate degree is a B.S. in
Petroleum Engineering from Oklahoma University and his graduate degree is an
M.B.A from Harvard University.

      Our Board of Directors held three meetings during the year ended December
31, 2005. Each Director participated in at least 75% of the aggregate number of
meetings held by the Board of Directors and its Committees during the time each
such Director was a member of the Board or of any Committee of the Board. The
only standing committee of the Board is the Audit Committee consisting entirely
of non-employee directors.

      The Audit Committee met once during the fiscal year ended December 31,
2005. The Audit Committee is primarily responsible for the effectiveness of our
accounting policies and practices, financial reporting and internal controls.

      We do not have a nominating or compensation committee primarily because of
the small size of our Board, the Board has determined not to establish another
standing committee. Nominees for Director will be selected or recommended by our
Directors who meet the Nasdaq/AMEX independence standards.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 ("Section 16") requires
that officers, directors and persons who own more than ten percent of our voting
securities file reports of their ownership and changes in such ownership with
the Securities and Exchange Commission (the "Commission"). Commission
regulations also require that such persons provide us with copies of all Section
16 reports they file. Based on information provided to us, Messrs. Ilyas
Chaudhary, Hickey and Kaufman each failed to timely file a Form 4.


                                       24


Code of Business Conduct and Ethics

We have a Code of Business Conduct and Ethics, which is applicable to all of our
employees, including executive officers and directors. The Code of Business
Conduct and Ethics is included in the 2003 Annual Report on Form 10-KSB as
Exhibit 14.

ITEM 10: EXECUTIVE COMPENSATION

Executive Officers

Our compensation program for executive officers is based on the following
principles:

Compensation should be reflective of overall Company financial performance and
an individual's contribution to the Company's success. Compensation packages
should be based on competitive practices designed to attract and retain highly
qualified executive officers. Long-term incentive compensation should be
construed to closely follow increases in stockholder return. There is currently
one employment contract with the president of the Company, terms of which are
set forth inhere below

Cash bonuses and stock options are provided on a discretionary basis but the
amounts of options issued are generally tied to the performance and prospects of
the Company. Individual executive officers and managers can earn a portion of
their cash and option bonuses based on financial performance of the Company
compared to budget and additional bonuses are paid at the discretion of the
Incentive Plan committee and approved by the Board of Directors.

Summary of Cash and Certain Other Compensation

The following table sets forth the compensation arrangement for the Chief
Executive Officer for each of the last three fiscal years. No other officer of
the Company was compensated in excess of $100,000 during the fiscal year ended
December 31, 2005.

                                               Executive        Other
Executive         Year   Salary      Bonus    equities (1)     benefits

Ilyas Chaudhary
  CEO             2005  $327,000  $ 108,000      --        Medical/Vehicle
Ilyas Chaudhary
   CEO            2004  $187,000  $      --      --        Medical/Vehicle/Home
                                                                         Office
Ilyas Chaudhary
   CEO            2003  $198,000  $      --  4,000,000     Medical/Vehicle/Home
                                                                         Office

(1) Represents issuance of options to acquire 4,000,000 shares of Common Stock
at an exercise price of $0.06 per share.

Option/SAR Grants During Current Fiscal Year:

We granted no options to the Chief Executive Officer during the year ended
December 31, 2005.

Aggregate Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table:


                                       25


The following table sets forth information regarding (i) the exercise of stock
options by the Company's Chief Executive Officer during the year 2005, and (ii)
the value of unexercised options for such officer as of December 31, 2005:

                                       Number of
                                        shares          Value of
                  No. of              underlying       unexercised
                  shares             unexercised      in-the-money
                 acquired    Value    options at      options at
 Name          on exercise  Realized  12/31/05 (1)   12/31/05 (1) (2)

Ilyas Chaudhary        --   $   --     4,000,000      $ 670,000

(1) All unexercised options were exercisable at December 31, 2005.

(2) The value of unexercised in-the-money options is based on the difference
between the exercise price of the options and $0.23, the closing price of our
Common Stock at December 31, 2005.

Director Compensation

Each member of our Board of Directors, who is also not our employee ("outside
Director"), receives $500 for each Board of Directors' meeting attended either
in person or by telephone. We reimburse Directors for expenses incurred in
attending board meetings. In addition, each outside Director receives an annual
stock option award to purchase 200,000 shares of our Common Stock. The exercise
price of the options is not less than the Common Stock's market price at the
time of the grant. The Options are considered fully vested and are exercisable
for a period of five years from the date of grant.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The following table sets forth the number and percentage of shares of the our
$.001 par value Common Stock owned beneficially, as of June 30, 2006, by any
person, who is known to us to be the beneficial owner of 5% or more of such
Common Stock, and, in addition, by each of our Directors, and by all of our
Directors and Executive Officers as a group. Information as to beneficial
ownership is based upon statements furnished to us by such persons, or in the
absence of such reports, from our records.


                                       26


                                               Shares of
                                Shares of     Common Stock
Name and address of            Common Stock    underlying             Percentage
 beneficial owner                 owned         options        Total    of class

Bushra Chaudhary (1)
10441 Villa del Cerro
Santa Ana, CA  92805             11,660,316            --    11,660,316    10.0%

Ilyas Chaudhary (2)
10441 Villa del Cerro
Santa Ana, CA  92805             19,968,290     4,000,000    23,968,290    20.0%

Danyal Chaudhary
  Foundation (3)
10441 Villa del Cerro
Santa Ana, CA  92805             21,480,000            --    21,480,000    18.5%

William J. Hickey
505 Saturmino Drive
Palm Springs, CA  92262                  --     1,000,000     1,000,000     0.8%

Paul L. Hayes Jr.
209 Middle Ridge Road
Stratton Mountain, VT 05155              --       200,000       200,000     0.1%

Irwin Kaufman
8224 Paseo Vista Drive
Las Vegas, NV  89128                280,000     1,000,000     1,280,000     1.1%

Dolphin Offshore
    Partners LP
129 East 17th Street
New York, NY 10003                       --    38,827,055    38,827,055    25.1%

J. Michael Myers                  3,950,000     8,000,000    11,950,000     9.6%
1319 Bradford Drive
Coppell, TX  75019

Peninsula Capital
  Management, Inc.,
  Peninsula Fund, L.P.,
  Scott Bedford
235 Pine Street, Suite
1818, San Francisco,
CA 94104 (4)                             --     6,650,000     6,650,000     5.4%

JVL Advisors, L.L.C.,
  John V. Lovoi
10,000 Memorial Drive,
Suite 550, Houston,
TX  77024  (4)                           --    10,571,333    10,571,333     8.3%


All Executive Officers
And Directors as a Group         20,248,290     6,675,000    26,923,290    21.9%
(5 persons)


                                       27


(1) Represents 11,660,316 restricted Common Shares held by Bushra Chaudhary, the
wife of our CEO and Chairman, who claims no beneficial ownership of these
shares.

(2) Consists of 8,760,400 controlled Common Shares held directly by Mr.
Chaudhary, and 8,799,140 and 2,408,750 restricted Common Shares held by Sedco,
Inc., and Capco Acquisub, Inc., respectively, private companies of which Mr.
Chaudhary is Chairman of the Board, Chief Executive Officer and beneficially
owns 100% of each company's outstanding stock.

(3) Represents 21,480,000 restricted Common Shares held by the Danyal Chaudhary
Foundation, a California non-profit organization in which the trustees are
Bushra Chaudhary, Faisal Chaudhary, Arshad M. Faroog and Ilyas Chaudhary, who
claims no beneficial ownership of these shares.

(4) Represents beneficial ownership claimed by each listed party as reported by
Form SC 13G filing.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None of our Directors or officers or who is a security holder who is known to us
to own of record, or beneficially, more than 5% of any class of our voting
securities, or any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who has the same home as such person or who is a
Director or officer of any parent or subsidiary of Capco Energy, Inc., has had
any transaction or series of transactions exceeding $60,000 during the past two
fiscal years, or has any presently proposed transactions to which we were or are
a party, in which any of such persons had or is to have direct or indirect
material interest, other than the following:

TRANSACTIONS INVOLVING THE COMPANY'S OFFICERS AND DIRECTORS

Year Ended December 31, 2005

We had several transactions with our Chief Executive Officer, Ilyas Chaudhary,
and Sedco, Inc. and Meteor Enterprises, Inc., private companies controlled by
Mr. Chaudhary ("affiliates"). We received cash advances in the total amount of
$263,000 from affiliates. We paid expenses in the amount of $28,000 in behalf of
affiliates, and were charged a total of $8,000 for expenditures made by
affiliates in our behalf. We accrued compensation expense in the amount of
$435,000 due to affiliates in accordance with the Chief Executive Officer's
employment. Included in the amount is the $108,000 that was reported as prepaid
compensation at the end of the year 2004. We made cash advances in the total
amount of $521,000 to affiliates that included payment of accrued compensation,
repayment of cash advances received during the year and settlement of
expenditures made by the respective parties during the year in behalf of each
other. At December 31, 2005,the amount of $49,000 was due to affiliates.


In October 2005, a private company owned by our Chief Executive Officer achieved
a restructuring of indebtedness that provided for the removal of our debt
guarantee, although we are a party to an indemnification agreement that survived
the settlement. Pursuant to the terms of the indemnification agreement, our
liability for the items covered by the indemnification is limited to $0.3
million. For our part in the restructuring we agreed to fund a total of $0.3
million to be applied to the outstanding indebtedness. Of this amount, $0.2
million was paid in December 2005, and $0.1 million was paid in January 2006. We
also granted 1.8 million warrants to Hoactzin as consideration for its
participation in the refinancing of the indebtedness. Using the Black Scholes
pricing model, the warrants were determined to have a fair value of $0.3
million. This cost has been charged to our operations, with a corresponding
increase to paid in capital. The warrants are exercisable for a period of five
years with an exercise price of $0.195 per share.


                                       28


Effective April 1, 2005, we divested our 80% equity interest in Bison Energy
Company ("Bison") that was acquired from one of our Directors during the year
2004, by selling the interest to the Director for our original investment.
Funding provided to Bison by us in 2004 in the amount of $50,000 that had
previously been accounted for as an advance to Bison was reclassified as a
payment against long-term debt owed to the Director. We incurred interest
expense in the amount of $7,000 on the indebtedness in 2005.

Year Ended December 31, 2004

We had several transactions with our Chief Executive Officer, Ilyas Chaudhary,
and Sedco, Inc. and Meteor Enterprises, Inc., private companies controlled by
Mr. Chaudhary ("affiliates"). We received cash advances in the total amount of
$350,000 from affiliates. We paid expenses in the amount of $93,000 in behalf of
affiliates, and were charged a total of $67,000 for expenditures made by
affiliates on our behalf. We accrued, and paid, compensation expense in the
amount of $175,000 due to affiliates in accordance with the Chief Executive
Officer's employment. We made cash advances in the total amount of $766,000 to
affiliates that included repayment of balances owed to affiliates at the
beginning of the year, repayment of cash advances received during the year and
settlement of expenditures made by the respective parties during the year in
behalf of each other. Of such advances, $108,000 was considered to be advance
payments of Mr. Chaudhary's compensation for the year 2005, and has been
reclassified as a prepaid expense in the accompanying financial statements as of
December 31, 2004. No amount was due to, or due from, affiliates at December 31,
2004.

In October 2004, we issued 3.6 million shares of Common Stock as consideration
for the acquisition cost of an oil and gas property. Approximately 70% of the
acquired working interest in the property was acquired either from an entity
controlled by our President or from individuals who are family members of an
officer of us; however, the negotiated acquisition price was determined in a
manner uniform to all members of the selling group.

Significant transactions with affiliates are initially negotiated by the
management and then thoroughly discussed and carefully reviewed by the Board.
Terms and conditions of all transactions always observe customary industry
practices. In particular, these reviews include in-depth discussions with Ilyas
Chaudhary concerning his negotiations with third parties, e.g.: the sale of the
Michigan and Montana properties came about after several months of discussions
and negotiations with third parties who were unable to complete the transaction
separately because they could not "unbundled" from the Omimex debt constraints.
Furthermore, the Board requires that a "fairness opinions" be prepared by a
qualified, disinterested third parties to insure, that the Company receives, for
all significant transaction, such as Meteor and Omimex properties the greatest
consideration, having regard for all relevant attendant circumstances.

Specifically, sales our assets to affiliates occur solely in cases where the
subject property cannot, for any number of reasons, be sold to non-affiliated
third parties. We, make every effort at the expense of depreciating the
asset(s), to insure that there is no qualified, willing or interested
independent purchaser available.

On the other hand, purchases of assets from affiliates are constantly reviewed
and revisited to determine that the purchase price(s) was, and is, in every
respect fair and reasonable.


                                       29


SALES OF PROPERTY

Year Ended December 31, 2004

Effective September 30, 2004, we sold our interests in non-operated producing
properties located in Alabama and Louisiana to a company owned by our Chief
Executive Officer. Sales proceeds in the amount of $0.4 million were received by
us in October 2004 and were used for working capital. We have the option to
repurchase the properties for an amount equal to the sales price within the next
twelve-month period. If it is determined through due diligence by us that the
properties could have been sold for an amount greater that $0.4 million, then
the related party has the obligation to pay such excess to us. No adjustment was
made in 2005 for the transaction as originally recorded.

Effective December 31, 2004, we sold our interests in non-operated producing
properties located in Michigan and Montana and other assets to our Chief
Executive Officer for the amount of $4.7 million. The sales amount was settled
by the payment of a cash deposit in the amount of $0.7 million, assumption of
debt against the properties in the amount of $3.3 million and issuance of a note
payable to us in the amount of $0.7 million. The note was paid in full in March
2005.


                                       30


                                     PART IV

ITEM 13.  EXHIBITS

(a) Documents filed as part of this Report:

     (1) The following Financial Statements are filed as part of this Report:

                                                                   Page
                                                                   ----

      Report of Independent Registered Public
       Accounting Firm, June 23, 2006                               F-1

      Report of Independent Registered Public Accounting
       Firm, April 1, 2005 (July 19, 2006, as to the effects
       of the reclassification as disclosed in Note 1)              F-2

      Consolidated Balance Sheet, December 31, 2005              F-3 - F-4

      Consolidated Statements of Operations for the
       years ended December 31, 2005 and 2004                       F-5

      Consolidated Statements of Stockholders'
       Equity for the years ended December 31, 2005 and 2004     F-6 - F-7

      Consolidated Statements of Cash Flows for the years
       ended December 31, 2005 and 2004                          F-8 - F-10

      Notes to Consolidated Financial Statements                F-11 - F-31

      Supplemental Information About Oil and Gas Producing
       Activities (unaudited)                                   F-31 - F-34


     (2) Exhibits

Exhibit
Number          Description                             Location
- -------   --------------------------      ------------------------------------
 2        Not applicable

 3.1      Articles of Incorporation       (incorporated by reference to
          and Bylaws                      Exhibits 4 and 5, respectively,
                                          to Registration Statement
                                          No. 2-73529)

 3.2      Articles of Amendment           (incorporated by reference to
                                          our Form 10-K filed
                                          May 31, 1984)

 3.3      Articles of Amendment           (incorporated by reference to
                                          our Form 10-K filed
                                          May 31, 1985)

 3.4      Articles of Amendment           (incorporated by reference to
                                          our Form 10-QSB filed
                                          January 19, 2000)


                                       31


Exhibit
Number          Description                             Location
- -------   --------------------------      -----------------------------------
4.        Instruments Defining the        (incorporated by reference to
          Rights of Security Holders,     Exhibits 4 and 5, respectively,
          Including Indentures            to Registration Statement
                                          No. 2-73529)

10.1      1999 Incentive Equity Plan      (incorporated by reference to the
                                          Company's definitive proxy statement
                                          filed December 2, 1999)

10.2      Stock Exchange Agreement        (incorporated by reference to the
          between Capco Energy, Inc.      Company's Form 10-KSB for the year
          and                             ended December 31, 1999, filed
          Sedco related to Capco          November 2, 2000
          Resource Corporation

10.3      Stock  Purchase  Agreement,     (incorporated  by reference to
          dated January 30, 2001,         Form 8-K of Meteor Industries,
          and between Capco Energy,       Inc. dated February 13, 2001,
          Inc. and Meteor Industries,     SEC File No. 0-27698)
          Inc.

10.4      First Amendment to Stock        (incorporated by reference to the
          Purchase Agreement dated        Company's Form 8-K filed May 7, 2001)
          April 27, 2001, by and
          between Capco Energy, Inc.
          and Meteor Industries, Inc.

10.5      Agreement by and among New      (incorporated by reference to the
          Mexico Marketing, Inc.,         Company's Form 10-KSB for the year
          Meteor Marketing, Inc.,         ended December 31, 2002, filed
          Graves Oil & Butane Co.,        April 23, 2003)
          and the Sole Shareholder of
          Graves Oil & Butane Co., Inc.

10.6      Stock Purchase Agreement        (incorporated by reference to the
          dated April 30, 2003, by        Company's Form 8-K filed May 16,
          and between Capco Energy,       2003)
          Inc. and Sedco, Inc.

10.7      Amendment to Purchase           (incorporated by reference to the
          Agreement by and between        Company's Form 10-QSB for the
          Sedco, Inc. and Capco           quarterly period ended September 30,
          Energy, Inc., September         2003, filed December 10, 2003)
          30, 2003

10.8      Purchase Agreement by           (incorporated by reference to the
          and between Sedco Energy,       Company's Form 10-KSB for the year
          Inc. and Capco Energy, Inc.,    ended December 31, 2003, filed
          December 31, 2003               April 15, 2004)

10.9      Purchase Agreement by           (incorporated by reference to the
          and between Sedco Energy,       Company's Form 10-KSB for the year
          Inc. and Capco Energy, Inc.,    ended December 31, 2003, filed
          December 31, 2003               April 15, 2004)


                                       32


Exhibit
Number          Description                             Location
- -------   --------------------------      -----------------------------------
10.10     Letter agreement dated          (incorporated by reference to the
          July 25, 2003, by and           Company's Form 10-KSB for the year
          between Omimex Canada, Ltd.,    ended December 31, 2003, filed
          Jovian Energy, Inc., and        April 15, 2004)
          Capco Resource Corporation

10.11     Letter agreement dated          (incorporated by reference to the
          September 29, 2004, by and      Company's Form 10-KSB for the year
          between Packard Gas Company     ended December 31, 2004, filed
          and Midwest EOR, Inc.           May 11, 2005)

10.12     Agreement dated November 23,    (incorporated by reference to the
          2004, by and among Capco        Company's Form 10-KSB for the year
          Energy, Inc. and Ilyas          ended December 31, 2004, filed
          Chaudhary                       May 11, 2005)

10.13     Letter of Intent dated          (incorporated by reference to the
          November 24, 2004, between      Company's Form 10-KSB for the year
          Packard Gas Company and         ended December 31, 2004, filed
          Midwest EOR, Inc.               May 11, 2005)

10.14     Securities Purchase             (incorporated by reference to the
          Agreement dated March 10,       Company's Form 8-K filed March 16,
          2005, by and among              2005)
          Capco Energy, Inc. and
          certain accredited
          investors

10.15     Asset Purchase Agreement        (incorporated by reference to the
          dated March 15, 2005, by        Company's Form 10-KSB for the year
          and among Manti Resources,      ended December 31, 2004, filed
          Inc., et al and Capco           May 11, 2005)
          Offshore, Inc.

10.16     Purchase and Sale Agreement     Filed herewith  electronically
          dated May 4, 2005, by and
          among Capco Offshore, Inc.
          and Hoactzin Partners, L.P.

10.17     Funding Agreement               Filed herewith electronically
          dated September 15,
          2006, by and among Capco
          Operating Corporation and
          Domain Development
          Partners I, LP.

10.18     Purchase and Sale agreement     Filed herewith electronically
          dated October 1, 2005, by
          and among Tag Operating
          Company, Inc., Inland Gas
          Corporation and Packard Gas
          Company


                                      33


Exhibit
Number          Description                             Location
- -------   --------------------------      ---------------------------------
10.19     Indemnification Agreement       Filed herewith electronically
          dated October 21, 2005, by
          and among Graves et al and
          Capco Energy, Inc.

10.20     Post-Default Settlement         Filed herewith electronically
          Agreement dated October 21,
          2005, by and among Graves
          et al and Capco Energy, Inc

14.       Code of Business Conduct        (incorporated by reference to the
          and Ethics                      Company's Form 10-KSB for the year
                                          ended December 31, 2003, filed
                                          April 15, 2004)

21.       List of Subsidiaries            Filed herewith electronically

23.1      Consent of Stonefield           Filed herewith electronically
          Josephson, Inc.

31.1      Certification of Chief          Filed herewith electronically
          Executive Officer

31.2      Certification of Chief          Filed herewith electronically
          Accounting Officer

32.1      Certification of Chief          Filed herewith electronically
          Executive Officer pursuant
          to 18 U.S.C. section 1350

32.2      Certification of Chief          Filed herewith electronically
          Accounting Officer pursuant
          to 18 U.S.C. section 1350


                                       34


ITEM 14. Principal Accountant Fees and Services

Audit Fees.

The aggregate fees billed, or expected to be billed, for each of the last two
fiscal years by Malone & Bailey, PC and Stonefield Josephson, Inc. for their
audits of the Company's annual financial statements and review of interim
financial statements, including the Company's Form 10-QSB reports, are $150,850
and $103,310 in the years 2005 and 2004, respectively.


Audit-Related Fees.

The Company was not billed for such services in either 2005 or 2004.


Tax Fees.

The Company was not billed for such services in either 2005 or 2004.


All Other Fees.

The Company was billed $2,970 by Stonefield Josephson, Inc. in the year 2005 for
the review of a Form S-8 and the Company's annual proxy statement; there were no
such billings in the year 2004.


                                       35


                                 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, we have duly caused this Report to be signed on our behalf by the
undersigned thereunto duly authorized.


                                        CAPCO ENERGY, INC.


                                        By /s/ Ilyas Chaudhary
Dated: August 9, 2006                      ---------------------------
                                          Ilyas Chaudhary, CEO

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the date indicated.

                                        By /s/ Ilyas Chaudhary
Dated: August 9, 2006                     ---------------------------
                                          Ilyas Chaudhary, CEO, President, and
                                          Director


                                        By /s/ Irwin Kaufman
Dated: August 9, 2006                     ---------------------------
                                          Irwin Kaufman, Director


                                        By /s/ William J. Hickey
Dated: August 9, 2006                     --------------------------
                                          William J. Hickey, Director


                                        By /s/ Paul L. Hayes
Dated: August 9, 2006                     --------------------------
                                          Paul L. Hayes, Director


                                       36

EX-10.16

Exhibit 10.16

PURCHASE AND SALE AGREEMENT

BETWEEN

CAPCO OFFSHORE, INC.

As Seller

AND

HOACTZIN PARTNERS, L.P.

As Buyer

May 4, 2005

ARTICLE 1.	DEFINITIONS
1.01	Additional Instruments
1.02	Ad Valorem Taxes
1.03	Allocation
1.04	Associated Parties
1.05	Base Purchase Price
1.06	Brazos Interest or Brazos Interests
1.07	Business Day
1.08	Chandeleur Interest or Chandeleur Interests
1.09	Claim or Claims
1.10	Closing
1.11	Closing Date
1.12	Condition
1.13	Disputed Claim
1.14	Effective Time. 7 a.m. local time where the Interests are located, as follows for the respective Interests:
1.15	Environmental Laws
1.16	Execution Date
1.17	Galveston Interest or Galveston Interests
1.18	High Island Interest or High Island Interests
1.19	Interest or Interests
1.20	Liability or Liabilities
1.21	Manager
1.22	NORM
1.23	Oil
1.24	Operator. The person, company, or other entity recognized as operator of an Interest by the applicable regulatory agency
1.25	Permitted Encumbrances
1.26	Property or Properties
1.27	Related Agreements
1.28	Strict Liability
1.29	Well or Wells

ARTICLE 2.	PURCHASE AND SALE
2.01	Sale of the Interests
2.02	Option Well
2.03	Subsequent Interests
ARTICLE 3.	PURCHASE PRICE
3.01	Base Purchase Prices
3.02	Allocation of Base Purchase Price
3.03	Adjustments to Base Purchase Price.
3.04	Closing Settlement Statement - Chandeleur Interests
3.05	Closing Settlement Statement - Brazos, Galveston and High Island Interests
3.06	Final Settlement
ARTICLE 4.	SELLER’S REPRESENTATIONS AND WARRANTIES
4.01	Representations and Warranties Not Exclusive
4.02	Organization; Name; Organizational Identification Number
4.03	Power and Authority; Authorizations; Enforceability; No Conflicts
ARTICLE 5.	COVENANTS OF SELLER
5.01	Designation of Manager
5.02	Management of the Interests; Payment of Costs
5.03	Remedies Upon Default
5.04	Seller Reacquisition of the Interests
5.05	Seller Operation of the Interests
5.06	Preservation of Existence
ARTICLE 6.	TITLE AND TITLE DEFECTS
6.01	Title
6.02	Related Agreements
ARTICLE 7.	PRE-CLOSING OBLIGATIONS
7.01	Preferential Rights
7.02	Third-Party Notifications and Approvals
ARTICLE 8.	CLOSING
8.01	Closing Date
8.02	Buyer’s Right to Delay Closing

8.03	Closing Obligations
8.04	Condition Precedent
8.05	Seller’s Representation by Closing
ARTICLE 9.	POST-CLOSING OBLIGATIONS
9.01	Filing and Recording
9.02	Further Assurances
9.03	Reassignment
9.04	Compliance
9.05	Plugging and Abandoning Wells; Remediation
9.06	Surrender or Abandonment of Interests
ARTICLE 10.	TAXES
10.01	Taxes - Chandeleur Interests
10.02	Taxes - Brazos, Galveston and High Island Interests
ARTICLE 11.	OIL IN STORAGE, PROCEEDS, COSTS, EXPENSES, CLAIMS, AND DISBURSEMENTS
11.01	Oil in Storage
11.02	Proceeds, Costs, and Expenses
11.03	Notice to Remitters of Proceeds
ARTICLE 12.	OPERATION OF THE INTERESTS
12.01	Operation by Seller
12.02	Risk of Loss
ARTICLE 13.	BOND IN FAVOR OF EXXONMOBIL
13.01	Bond in Favor of ExxonMobil
13.02	Financing Statement
ARTICLE 14.	PREFERENTIAL RIGHT TO PURCHASE OIL
	Seller will not reserve any preferential right to purchase oil produced from the Interests. Buyer acknowledges the first right of refusal to purchase production from the Chandeleur Interests which is retained by Manti pursuant to Section 6.03 of the Manti Agreement.
ARTICLE 15.	PREFERENTIAL RIGHT TO PURCHASE GAS
	Seller will not reserve any preferential right to purchase gas produced from the Interests. Buyer acknowledges the first right of refusal to purchase production from the Chandeleur Interests which is retained by Manti pursuant to Section 6.03 of the Manti Agreement.

ARTICLE 16.	SELLER'S RELEASE, DISCHARGE, AND COVENANT NOT TO SUE; SELLER'S OBLIGATIONS TO INDEMNIFY, DEFEND, AND HOLD HARMLESS; DISPUTE RESOLUTION
16.01	Seller's Release and Discharge of Buyer and its Associated Parties
16.02	Seller’s Covenant Not to Sue Buyer or its Associated Parties
16.03	Seller's Obligations to Indemnify, Defend, and Hold Buyer and its Associated Parties Harmless
16.04	Seller's Obligations
16.05	Seller’s Duty to Defend
16.06	Alternate Dispute Resolution and Arbitration
16.07	Retroactive Effect
16.08	Inducement to Buyer
ARTICLE 17.	ENVIRONMENTAL MATTERS
17.01	Acknowledgment Concerning Possible Contamination of the Interests and Property
17.02	Seller Assumption of Environmental Liabilities
ARTICLE 18.	BUYER'S REPRESENTATIONS AND COVENANTS
18.01	Organization
18.02	Power and Authority; Authorization; Enforceability; No Conflicts; Etc
18.03	Securities Laws
18.04	Seller Qualification
ARTICLE 19.	GAS IMBALANCES
19.01	Seller's and Buyer's Respective Obligations
ARTICLE 20.	FINAL SETTLEMENT STATEMENT
20.01	Preparation
20.02	Final Settlement
ARTICLE 21.	BROKER'S AND FINDER'S FEES
ARTICLE 22.	COMMUNICATIONS
ARTICLE 23.	SELLER’S DEFAULT
ARTICLE 24.	HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976
ARTICLE 25.	MISCELLANEOUS
25.01	Entire Agreement

25.02	Successors and Assigns; Amendment; Survival
25.03	Choice of Law
25.04	Assignment
25.05	No Admissions
25.06	No Third-Party Beneficiaries
25.07	Public Communications
25.08	Headings and Titles
25.09	Exhibits
25.10	Includes
25.11	Severability
25.12	Counterparts
25.13	Conflicts
25.14	Not to Be Construed against the Drafter
25.15	No Waiver
25.16	Conspicuousness
25.17	Execution by the Parties

PURCHASE AND SALE AGREEMENT

This Purchase and Sale Agreement ("Agreement") is between Capco Offshore, Inc., a Texas corporation with an address of 5555 San Felipe, Suite 725, Houston, Texas 77056 (“Seller"), as seller, and Hoactzin Partners, L.P., a Delaware limited partnership with an address of 87 South Saxon Avenue, Bay Shore, New York, New York 11706 (“Buyer”), as buyer, effective on the Execution Date.

WHEREAS, Seller owns the Brazos Interests and the Galveston Interests (as each is hereinafter defined);

WHEREAS, Seller has acquired the Chandeleur Interests (as hereinafter defined) pursuant to that certain Asset Purchase Agreement between Manti Resources, et al (“Manti”) and Seller, executed March 11, 2005 with an effective time of January 1, 2005 (the “Manti Agreement”);

WHEREAS, Seller has acquired the High Island Interests (as hereinafter defined) from Exxon Mobil Corporation (“ExxonMobil”) pursuant to that certain Purchase and Sale Agreement between ExxonMobil and Seller, executed December 1 and 2, 2004 and with an effective time of November 1, 2004 (the “ExxonMobil Agreement”);

WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, all of the Chandeleur Interests, all of the High Island Interests, undivided portions of the Brazos Interests, undivided portions of the Galveston Interests, and an option to acquire an undivided portion of additional Brazos Interests;

WHEREAS, an affiliate of Buyer has advanced to the parent entity of Seller $6,435,960.85 pursuant to that certain Amended and Restated Note Purchase Agreement between Dolphin Direct Equity Partners, L.P. and Capco Energy, Inc., et al dated February 7, 2004, as evidenced by that certain Amended and Restated Secured Promissory Note of same date (the “Bridge Note”);

WHEREAS, Buyer desires for Seller to operate and manage the Interests in Buyer’s place and stead, and the parties wish to provide for future funding of capital requirements with respect to the Interests; and

WHEREAS, Seller and Buyer desire, after the occurrence of certain events, that Seller reacquire the Interests.

NOW, THEREFORE, in consideration of their mutual promises under this Agreement, the benefits to be derived by each party, and other good and valuable consideration, Buyer and Seller agree as follows:

ARTICLE 1.  DEFINITIONS

The following terms, when used in this Agreement, will have the following definitions:

Additional Instruments.The instruments executed by Buyer before and at Closing and delivered to Seller in connection with this transaction.

Ad Valorem Taxes. Defined in Section 10.01.

Allocation. The amount allocated to each individual part of the Interests, in the case of the Chandeleur Interests by Buyer pursuant to the Manti Agreement and in the case of the Brazos Interests, the Galveston Interests, and the High Island Interests by Seller.

Associated Parties. Successors, assigns, directors, officers, employees, agents, contractors, subcontractors, and affiliates.

Base Purchase Price. The respective amounts set forth in Section 3.01 for the Brazos Interests, the Chandeleur Interests, the Galveston Interests, and the High Island Interests, respectively.

Brazos Interest or Brazos Interests. Seller's interest in the oil and gas leasehold estates or other interests set forth on Exhibit A-1, together with Seller's interest in the following:

each Well located on the leases and land described on Exhibit A-1.

the easements, permits, licenses, surface and subsurface leases, rights-of-way, servitudes, and other surface and subsurface rights affecting the land and leases described on Exhibit A-1.

material, equipment, and facilities in and on the land and used solely in connection with the use or operation of the leasehold estates and other interests described on Exhibit A-1 for Oil or gas purposes.

the facilities and pipelines located pursuant to the rights described in (b) above and necessary to market the production from the Brazos Interests.

contracts affecting the Brazos Interests, including agreements for sale or purchase of oil, gas, and other hydrocarbons; processing agreements; division orders; unit agreements; operating agreements; and other contracts and agreements arising out of, connected with, or attributable to production from the Brazos Interests.

The Brazos Interests do not include the reservations, exceptions, and exclusions listed on Exhibit A-1 or the following:

(A) pipelines, fixtures, equipment, and interests in land owned by third parties such as lessors, purchasers, or transporters of Oil or gas;

(B) personal property, fixtures, equipment, pipelines, facilities, and buildings located on the Property, but currently in use in connection with the ownership or operation of other property not included in the Brazos Interests; and

(C) Seller's gas-production-imbalance accounts for the Brazos Interests.

Business Day. Any day that the headquarters offices of ExxonMobil Production Company, in Houston, Texas, are scheduled to be and are open for business.

Chandeleur Interest or Chandeleur Interests. Seller's interest in the oil and gas leasehold estates or other interests set forth on Exhibit A-2, together with Seller's interest in the following:

each Well located on the leases and land described on Exhibit A-2.

the easements, permits, licenses, surface and subsurface leases, rights-of-way, servitudes, and other surface and subsurface rights affecting the land and leases described on Exhibit A-2.

material, equipment, and facilities in and on the land and used solely in connection with the use or operation of the leasehold estates and other interests described on Exhibit A-2 for Oil or gas purposes.

the facilities and pipelines located pursuant to the rights described in (b) above and necessary to market the production from the Chandeleur Interests.

contracts affecting the Chandeleur Interests, including agreements for sale or purchase of oil, gas, and other hydrocarbons; processing agreements; division orders; unit agreements; operating agreements; and other contracts and agreements arising out of, connected with, or attributable to production from the Chandeleur Interests.

The Chandeleur Interests do not include the reservations, exceptions, and exclusions listed on Exhibit A-2 or the following:

(A) pipelines, fixtures, equipment, and interests in land owned by third parties such as lessors, purchasers, or transporters of Oil or gas;

(B) personal property, fixtures, equipment, pipelines, facilities, and buildings located on the Property, but currently in use in connection with the ownership or operation of other property not included in the Chandeleur Interests; and

(C) Seller's gas-production-imbalance accounts for the Chandeleur Interests.

Claim or Claims. Collectively, claims, demands, causes of action, and lawsuits asserted or filed by any person, including an artificial or natural person; a local, state, or federal governmental entity; a person holding rights under any Related Agreement; an Associated Party of Buyer or Seller; or a third party.

Closing. The delivery of the conveyancing instruments and funds by the parties to close the purchase and sale of the Interests.

Closing Date. The date on which Closing is scheduled to and does occur.

Condition. Defined in Section 17.02 of the Exxon Mobil Agreemeent.

Disputed Claim. Defined in Section 16.06.

Effective Time. 7 a.m. local time where the Interests are located, as follows for the respective Interests:

Brazos Interests:         February 1, 2005;

Chandeleur Interests: January 1, 2005;

Galveston Interests:   December 30, 2004; and

High Island Interests:November 1, 2004.

Environmental Laws. Applicable federal, state, and local laws, including statutes, regulations, orders and ordinances, previously or currently enacted or enacted in the future, and common law, relating to protection of public health, welfare, and the environment, including those laws relating to storage, handling, and use of chemicals and other hazardous materials; those relating to the generation, processing, treatment, storage, transport, disposal, cleanup, remediation, or other management of waste materials or hazardous substances of any kind; and those relating to the protection of environmentally sensitive or protected areas. "Environmental Laws" includes the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, the Clean Water Act, the Safe Drinking Water Act, the Hazardous Materials Transportation Act, the Toxic Substance Control Act, and the Clean Air Act, as each is amended from time to time.

Execution Date. The date on which the last of the parties executes this Agreement.

Galveston Interest or Galveston Interests. Seller's interest in the oil and gas leasehold estates or other interests set forth on Exhibit A-3, together with Seller's interest in the following:

each Well located on the leases and land described on Exhibit A-3.

the easements, permits, licenses, surface and subsurface leases, rights-of-way, servitudes, and other surface and subsurface rights affecting the land and leases described on Exhibit A-3.

material, equipment, and facilities in and on the land and used solely in connection with the use or operation of the leasehold estates and other interests described on Exhibit A-3 for Oil or gas purposes.

the facilities and pipelines located pursuant to the rights described in (b) above and necessary to market the production from the Galveston Interests.

contracts affecting the Galveston Interests, including agreements for sale or purchase of oil, gas, and other hydrocarbons; processing agreements; division orders; unit agreements; operating agreements; and other contracts and agreements arising out of, connected with, or attributable to production from the Galveston Interests.

The Galveston Interests do not include the reservations, exceptions, and exclusions listed on Exhibit A-3 or the following:

(A) pipelines, fixtures, equipment, and interests in land owned by third parties such as lessors, purchasers, or transporters of Oil or gas;

(B) personal property, fixtures, equipment, pipelines, facilities, and buildings located on the Property, but currently in use in connection with the ownership or operation of other property not included in the Galveston Interests; and

(C) Seller's gas-production-imbalance accounts for the Galveston Interests.

High Island Interest or High Island Interests. Seller's interest in the oil and gas leasehold estates or other interests set forth on Exhibit A-4, together with Seller's interest in the following:

each Well located on the leases and land described on Exhibit A-4.

the easements, permits, licenses, surface and subsurface leases, rights-of-way, servitudes, and other surface and subsurface rights affecting the land and leases described on Exhibit A-4.

material, equipment, and facilities in and on the land and used solely in connection with the use or operation of the leasehold estates and other interests described on Exhibit A-4 for Oil or gas purposes.

the facilities and pipelines located pursuant to the rights described in (b) above and necessary to market the production from the High Island Interests.

contracts affecting the High Island Interests, including agreements for sale or purchase of oil, gas, and other hydrocarbons; processing agreements; division orders; unit agreements; operating agreements; and other contracts and agreements arising out of, connected with, or attributable to production from the High Island Interests.

The High Island Interests do not include the reservations, exceptions, and exclusions listed on Exhibit A-4 or the following:

(A) pipelines, fixtures, equipment, and interests in land owned by third parties such as lessors, purchasers, or transporters of Oil or gas;

(B) personal property, fixtures, equipment, pipelines, facilities, and buildings located on the Property, but currently in use in connection with the ownership or operation of other property not included in the High Island Interests; and

(E) Seller's gas-production-imbalance accounts for the High Island Interests.

Interest or Interests. Collectively, the Brazos Interests, the Chandeleur Interests, the Galveston Interests, and the High Island Interests.

Liability or Liabilities. Collectively, all damages (including consequential and punitive damages), including those for personal injury, death, or damage to personal or real property (both surface and subsurface) and costs for remediation, restoration, or clean up of contamination, whether the injury, death, or damage occurred or occurs on or off the Property by migration, disposal, or otherwise; losses; fines; penalties, expenses; costs to remove or modify facilities on or under the Property; plugging liabilities for all Wells; attorneys' fees;courtand other costs incurred in defending a Claim; liens; and judgments; in each instance, whether these damages and other costs are foreseeable or unforeseeable.

Manager. Defined in Section 5.01.

NORM. Naturally occurring radioactive material.

Oil. Crude oil, distillate, drip gasoline, condensate, and other liquid hydrocarbons.

Operator. The person, company, or other entity recognized as operator of an Interest by the applicable regulatory agency.

Permitted Encumbrances. (i) royalties, overriding royalties, reversionary interests, production payments and similar burdens which are in existence on the date hereof; (ii) sales contracts or other arrangements for the sale of production hydrocarbons which would not (when considered cumulatively with the matters discussed in clause (i) above) deprive the Buyer of any material right in respect of the Interests and Property (except for rights customarily granted with respect to such contracts and arrangements); (iii) statutory liens for taxes or other assessments that are not yet delinquent (or that, if delinquent, are being contested in good faith by appropriate proceedings, levy and execution thereon having been stayed and continue to be stayed; (iv) easements, rights of way, servitudes, permits, surface leases and other rights in respect to surface operations, pipelines, grazing, logging, canals, ditches, reservoirs or the like, conditions, covenants and other restrictions, and easements of streets, alleys, highways, pipelines, telephone lines, power lines, railways and other easements and rights of way on, over or in respect of the Interests and Property and that do not individually or in the aggregate, cause a material adverse effect upon the operations or value of Interests and Property; and (v) rights reserved to or vested in any municipality, governmental, statutory or other public authority to control or regulate the Interests and Property in any manner, and all applicable laws, rules and orders from any governmental authority.

Property or Properties. The real property in which and on which the respective Interests exist or are located, whether in whole or in part.

Related Agreements. Defined in Section 6.02.

Strict Liability. Includes strict statutory liability and strict products liability.

Well or Wells. All wellbores, both abandoned and unabandoned, including oil wells, gas wells, injection wells, disposal wells, and water wells.

ARTICLE 2. PURCHASE AND SALE

Sale of the Interests. Pursuant to Seller’s offer, Seller agrees to sell the Interests to Buyer, and Buyer agrees to purchase them from Seller, for the consideration recited in and subject to the terms of this Agreement, as follows:

All of Seller’s right, title and interest in and to the Chandeleur Interests and the High Island Interests;

An undivided 30% of 8/8ths working interest out of Seller’s right, title and interest in and to the Brazos Interests identified on Exhibit A-1 as (i) Brazos 440L/441L/406L/407L, limited, however, to the wellbore of the Brazos 440I-L Well, (ii) Brazos 478L/479L, limited, however, to the wellbore of the Brazos 478 L-2 Well, and (iii) Brazos 440L, limited, however, to the wellbore of the Brazos 4012 Well; and, in each case of a wellbore limitation, Buyer’s interest shall be limited to the oil, gas and mineral leases described in Exhibit A-1 with respect to each Well as to all lands and depths described in such Leases to the extent and only to the extent such Leases are necessary to produce oil and/or gas from the wellbore of the Wells described hereinabove (or the applicable part or portion thereof if specifically limited in depth and/or areal extent on Exhibit A-1);

An undivided 30% of 8/8ths interest out of Seller’s right, title and interest in and to the Galveston Interests identified on Exhibit A-3 as Galveston Block 297, limited, however, to the wellbore of the GA 297 Well before Payout, which interest shall be reduced to an undivided 25.5% after Payout; for purposes of this paragraph only, the term “Payout” shall have the same meaning as in that certain Offshore Participation Agreement dated December 30, 2004, between Seller and Fidelity Exploration and Production Company, Inc.; and, Buyer’s interest shall be limited to the oil, gas and mineral leases described in Exhibit A-3 with respect to each Well as to all lands and depths described in such Leases to the extent and only to the extent such Leases are necessary to produce oil and/or gas from the wellbore of the GA 297 Well (or the applicable part or portion thereof if specifically limited in depth and/or areal extent on Exhibit A-3). Buyer’s obligation to pay the costs of the GA 297 Well shall not arise until after Seller has provided to Buyer the logs of the GA 297 Well and indicated that it elects to complete the Well for the production of Oil and gas. Thereafter, Buyer shall pay its proportional share of the costs to complete the Well; however, in no event shall Buyer be obligated to pay the costs of drilling the Well or, if not completed, to pay any costs of plugging and abandonment.

Option Well. Seller hereby grants to Buyer the right and option to acquire an undivided 30% of 8/8ths working interest out of Seller’s right, title and interest in and to the Brazos Interests identified on Exhibit A-1 as Brazos 440L/441L/406L/407L, limited, however, to the wellbore of the Brazos 440 A-1 Well (“Option Well”) upon payment of $200,000.00 to Seller. In each case of a wellbore limitation, Buyer’s interest shall be limited to the oil, gas and mineral leases described in Exhibit A-1 with respect to each Well as to all lands and depths described in such Leases to the extent and only to the extent such Leases are necessary to produce oil and/or gas from the wellbore of the Wells described hereinabove (or the applicable part or portion thereof if specifically limited in depth and/or areal extent on Exhibit A-1). Seller shall provide written notice to Buyer not less than 30 days prior to the date operations are to commence upon the Option Well of its right to exercise the Option Well option. Buyer shall provide written notice of its election to exercise said option not more than 10 days after delivery of Buyer’s notice, after which time said option shall expire. If Buyer elects to exercise said option, the parties shall effect conveyance, management, operation, and reacquisition of the interest acquired by Buyer in the Option Well in the same manner as the remaining Interests are treated in this Agreement, the Management Agreement, and the Operating Agreements.

Subsequent Interests. The parties agree that, should Seller on one or more occasions in the future identify additional interests, whether owned by Seller or potentially to be acquired by Seller (“Subsequent Interests”), which it desires to offer for sale to Buyer, and should Buyer desire to acquire said Subsequent Interests, the parties shall enter into an addendum to this Agreement (an “Addendum Agreement”) by which such Subsequent Interests shall become subject to the terms and provisions of this Agreement, the Management Agreement, and an Operating Agreement (to extent the particular Subsequent Interest is or would be operated by Seller) as if said Subsequent Interest were identified herein upon execution hereof. Said Addendum Agreement shall identify the Subsequent Interest(s) subject thereto, and shall amend any such terms of this Agreement to adapt same to the specific Subsequent Interest(s) subject thereto, including but not limited to the related closing date.

ARTICLE 3. PURCHASE PRICE

Base Purchase Prices. The Base Purchase Price for the Interests is as follows:

Brazos Interests and Galveston Interests: $1,500,000.00;

Chandeleur Interests: $12,000,000.00; and

High Island Interests: $4,000,000.

Each of the Brazos Interests, the Chandeleur Interests, the Galveston Interests, and the High Island Interests is subject to adjustment only as provided in this Agreement.

Allocation of Base Purchase Price. As to the Chandeleur Interests, Seller has delivered to Buyer or will, not less than three (3) days before Closing, deliver to Buyer the Allocation provided for by Section 2.02 of the Manti Agreement. As to the Brazos Interests, the Galveston Interests, and the High Island Interests, Buyer has delivered or will deliver prior to the Closing to Seller an Allocation of the Base Purchase Price to each individual part of such Interests, respectively (including an Allocation for non-investment account balances such as gas-production-imbalance accounts, as required for compliance with applicable law, for equipment or other items, and including an Allocation for the option on the Option Well). Buyer will make reasonable allocations, in good faith, and Seller may rely on the Allocations for all purposes. The Allocations will be used (a) to notify holders of preferential rights of this transaction; (b) to collect taxes, to the extent required by law and as provided in Article 10; (c) as a basis for adjustments to the Base Purchase Price for the Interests; and (d) as otherwise provided in this Agreement

Adjustments to Base Purchase Price.. The Base Purchase Price for the Interests shall be adjusted in the following manner:

As to the Chandeleur Interests, in the same manner and in the same amounts, dollar for dollar, as the purchase price adjustments provided for by the closing settlement statement provided for by Section 2.05 of the Manti Agreement; and

As to the Brazos Interests, the Galveston Interests, and the High Island Interests, respectively, the Base Purchase Price shall be, without duplication:

Increased by the following amounts:

The aggregate amount of all non-reimbursed amounts attributable to the operation and ownership of the Interests incurred and paid in the ordinary course of business during the period from the respective Effective Time to the Closing Date;

An amount equal to the agreed value of all Oil and gas in storage above the pipeline connection or delivery point, as the case may be;

The amount of any upward adjustment pursuant to Article 6; and

Any other upward adjustment mutually agreed upon by the parties;

Decreased by the following amounts:

The aggregate amount of proceeds received by Seller from the sale of Oil and gas produced from and attributable to the Interests between the Effective Time and the Closing Date;

The amount of any downward adjustment relating to Title Defects pursuant to Article 6;

Seller’s share of estimated ad valorem taxes through the Effective Time; and

The amount of any downward adjustment mutually agreed upon by the parties.

Closing Settlement Statement - Chandeleur Interests. As to the Chandeleur Interests, Seller shall, promptly upon receipt of Manti’s closing settlement statement, deliver a copy of same to Buyer (the “Chandeleur Closing Settlement Statement”). Buyer shall promptly thereafter notify Seller of its comments on, and any desired adjustments to, the Chandeleur Closing Settlement Statement.

Closing Settlement Statement - Brazos, Galveston and High Island Interests. As to the Brazos Interests, the Galveston Interests, and the High Island Interests respectively, Seller shall provide to Buyer a closing settlement statement (the “Brazos, et al Closing Settlement Statement”) prior to Closing presenting adjustments to the Base Purchase Price for the respective Interests that are subject to this Section 3.05, which Brazos, et al Closing Settlement Statement shall set out separately the adjustments applicable to the respective Interests. Prior to Closing, Buyer and Seller shall agree upon the Brazos, et al Closing Settlement Statement which shall include adjustments, known as of the Closing Date, pursuant to Section 3.03 hereof. Seller shall exclude from the Brazos, et al Closing Settlement Statement and the Final Settlement Statement the final adjustments that occurred pursuant to the ExxonMobil Agreement.

Final Settlement. As to the Chandeleur Interests, final settlement under this Agreement shall occur in accordance with the provisions of Section 2.05(c) of the Manti Agreement for the account of Buyer. Final settlement with respect to the Brazos Interests, the Galveston Interests, and the High Island Interests shall occur as provided by Article 20 of this Agreement.

ARTICLE 4. SELLER’S REPRESENTATIONS AND WARRANTIES

Representations and Warranties Not Exclusive. Seller’s representations under this article are in addition to its other representations and warranties under this Agreement and the Additional Instruments.

Organization; Name; Organizational Identification Number. Seller represents and warrants that it is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Seller is qualified or licensed to conduct its business and is in good standing in each jurisdiction where the nature of its activities or the character of the properties utilized in its business make such qualification or licensing necessary. Seller’s correct legal name is set forth above Seller’s signature hereto. The location of Seller’s chief executive office is the address listed in the introductory paragraph of this Agreement .

Power and Authority; Authorizations; Enforceability; No Conflicts. Seller represents and warrants that:

(a) Seller has full corporate power and authority to own its assets and to carry on its business as it is now being conducted and to execute and deliver this Agreement and each of the Additional Instruments and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

(b) The execution, delivery and performance by Seller of this Agreement and the Additional Instruments to which Seller is a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly authorized by all requisite action of Seller.

(c) This Agreement and the Additional Instruments to which Seller is a party have been duly and validly executed and delivered by Seller and constitute the legal, valid and binding obligations of Seller, enforceable against it in accordance with their respective terms.

(d) The execution and delivery by Seller of this Agreement and each of the Additional Instruments to which it is a party, the performance by Seller of its obligations hereunder and thereunder and the consummation by Seller of the transactions contemplated hereby and thereby do not:

(i)violate any provision of the certificate of incorporation or bylaws (or comparable organizational documents) of Seller;

(ii)result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any oral or written agreement, instrument, contract, undertaking, mortgage, indenture, lease, license or other understanding to which Seller is a party or by which any of the properties or assets of Seller may be bound or otherwise subject; or

(iii)contravene or violate any law, rule, regulation, or order applicable to Seller, Seller’s Associated Parties, or any of their respective properties or assets.

(e) Except as provided by Sections 9.01 and 18.04, no consent of any governmental body or other person is required to be made or obtained by Seller in connection with the execution, delivery and performance by Seller of this Agreement or any other Additional Instruments to which Seller is a party or the consummation by Seller of the transactions contemplated hereby and thereby.

Seller’s Review - Chandeleur Interests. With respect to the Chandeleur Interests, Seller represents and warrants that:

(a) It has performed, as a prudent operator of offshore oil and gas properties, the buyer’s review of the Chandeleur Interests and Property provided for by Article 11 of the Manti Agreement, including availing itself of the opportunity to inspect and inventory the Chandeleur Interests and Property and making all appropriate inquiry to satisfy itself of the condition of the Chandeleur Interests and Property; and

(b) Data and data files related to the Chandeleur Interests are materially complete and are maintained in accordance with generally accepted standards in the industry;

(c) Seller has identified no instance of material non-compliance by Manti and/or its Associated Parties with rules, regulations, statutes, and laws, including Environmental Laws, applicable to Manti’s ownership or operation of the Chandeleur Interests or Property and with all Related Agreements;

(d) Seller has identified (i) no environmental Condition, nor (ii) nor any violation of environmental laws pursuant to Section 11.05 of the Manti Agreement which would reasonably be expected to materially adversely affect the ownership, operation, and maintenance of the Chandeleur Interests or the Property;

(e) No Title Defect exists with respect to the Chandeleur Interests and the Property.

(f) No suit, action, claim, or other proceeding is now pending or, to Seller’s knowledge, threatened before any court or governmental agency against the Chandeleur Interests, and Seller shall promptly notify Buyer in writing of any such proceeding which arises or is threatened prior to the Closing.

(g) To Seller’s knowledge, the Chandeleur Interests and Related Agreements are in full force and effect and are valid and subsisting documents covering the entire estates which they purport to cover; and all royalties, rentals and other payments due under the Chandeleur Interests and Related Agreements have been fully, properly and timely paid. Seller will use its commercially reasonable efforts to take all actions to keep, the Chandeleur Interests and Related Agreements in force and effect until the Closing.

(h) All due and payable ad valorem, property, production, severance and similar taxes and assessments based on or measured by the ownership of property of the production of Oil and gas or the receipt of proceeds therefrom on the Chandeleur Interests, which become due prior to the Closing Date for any periods prior to the Effective Date, have been properly paid.

(i) Seller is not obligated, by virtue of a production payment, prepayment arrangement under any contract for the sale of Oil and gas and containing a “take or pay,” advanced payment or similar provision, gas balancing agreement or any other arrangement to deliver Oil and/or gas produced from the Chandeleur Interests at any time after the Effective Date without then or thereafter receiving full payment therefor.

(j) No existing agreements, options, or commitments with, of or to any person to acquire the Chandeleur Interests are in effect.

Seller’s Representations and Warranties - Brazos, Galveston and High Island Interests. With respect to the Brazos Interests, the Galveston Interests, and the High Island Interests, Seller represents and warrants that:

(a) Agreements. To Seller's knowledge, Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Related Agreements associated therewith, are in full force and effect and are valid and subsisting documents covering the entire estates which they purport to cover; and all royalties, rentals and other payments due under the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Related Agreements associated therewith have been fully, properly and timely paid. Seller will use its commercially reasonable efforts to take all action necessary to keep the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Related Agreements associated therewith, in force and effect until the Closing.

(b) Prepayments and Wellhead Imbalances. Seller is not obligated, by virtue of a production payment, prepayment arrangement under any contract for the sale of hydrocarbons and containing a "take or pay", advance payment or similar provision, gas balancing agreement or any other arrangement to deliver hydrocarbons produced from the Brazos Interests, the Galveston Interests, and the High Island Interests at any time after the Effective Time without then or thereafter receiving full payment therefor.

(c) Taxes. All due and payable ad valorem, property, production, severance and similar taxes and assessments based on or measured by the ownership of property or the production of hydrocarbons or the receipt of proceeds therefrom on the Brazos Interests, the Galveston Interests, and the High Island Interests which become due prior to the Closing Date for any periods prior to the Effective Time, have been properly paid.

(d) Maintenance of Interests. Seller has maintained and will continue from date of this Agreement until the Closing, to maintain and operate the Brazos Interests, the Galveston Interests, and the High Island Interests in a reasonable and prudent manner, in full compliance with applicable law and orders of any governmental authority, to maintain insurance and bonds now in force with respect to the Brazos Interests, the Galveston Interests, and the High Island Interests to pay when due all costs and expenses coming due and payable in connection with the Brazos Interests, the Galveston Interests, and the High Island Interests, and to perform all of the covenants and conditions contained in the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Related Agreements associated therewith.

(e) Suits and Claims. No suit, action, claim, or other proceeding is now pending or, to Seller's best knowledge, threatened before any court or governmental agency against the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Property associated therewith, and Seller shall promptly notify Buyer in writing of any such proceeding which arises or is threatened prior to the Closing.

(f) Access. To the same extent Seller has such right, at all times prior to the Closing, Buyer and the employees and agents of Buyer shall have access to the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Property associated therewith at Buyer's sole risk, cost and expense at all reasonable times, and shall have the right to conduct equipment inspections, environmental audits, and any other investigation of the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Property associated therewith on one day’s prior notice to Seller and upon agreement with Seller as to time and place of such actions.

(g) Environmental Matters. To Seller’s knowledge, Seller is not in material violation of any Environmental Laws applicable to the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Property associated therewith, or any material limitations, restrictions, conditions, standards, obligations or timetables contained in any Environmental Laws. No notice or action alleging such violation is pending or, to Seller’s best knowledge, threatened against the Brazos Interests, the Galveston Interests, and the High Island Interests, and the respective Property associated therewith.

(h) No Third Party Options. No existing agreements, options, or commitments with, of or to any person to acquire the Interests are in effect.

(i)Existing Condition. Except with respect to the Chandeleur Interests, Seller has and will continue to operate the Interests and the respective Property associated therewith in the ordinary course of business and in substantially the same manner as it was operated prior to the Effective Date. No material adverse changes in the condition of the Interests and respective Property associated therewith, from the Effective Time to the Closing Date, have occurred.

Title to the Interests. Seller will convey to Buyer Defensible title to the Interests on the Closing Date.

ARTICLE 5. COVENANTS OF SELLER

Designation of Manager. Buyer hereby designates Seller as manager of the Interests (“Manager”) pursuant to the terms and provisions of the Management Agreement attached hereto as Exhibit C. Should Buyer elect to exercise the option as to the Option Well, the Option Well shall become subject to the Management Agreement.

Management of the Interests; Payment of Costs.

(a) So long as Seller shall remain Manager of the Interests, Seller shall:

(i)Cause the Interests to be maintained and operated for the production of Oil and gas in a good and workmanlike manner, as would a prudent operator (and without regard to the existence of the covenant to reacquire the Interests), all in accordance with generally accepted standards, the Management Agreement, and all applicable federal, state and local laws, rules and regulations.

(ii)Cause the Interests to be operated and maintained in compliance with all applicable laws, rules and regulations (including Environmental Laws) and in compliance with the Related Agreements governing the same.

(b) At all times prior to the Termination Date (as such term is defined in the Management Agreement), Seller shall:

(i)Pay or cause to be paid on behalf of Buyer, promptly as and when due and payable, all rentals and royalties payable with respect to the production of Oil and gas from the Interests and all costs incurred in or arising from the operation of the Interests or the production, treating, gathering, marketing or transporting of Oil and gas from the Interests.

(ii)Pay or cause to be paid all capital costs which the parties agree upon pursuant to the Management Agreement and all other costs that are required for the prudent and reasonable maintenance and operation of the Interests in accordance with the Operating Agreement.

(iii)Maintain true and correct books and records sufficient to determine the amounts payable under the Management Agreement. Such books and records shall be open for inspection by Buyer upon reasonable notice at Seller's office during normal business hours. Within thirty (30) days following March 31, June 30, September 30 and December 31 of each year during the term of the Management Agreement, Seller shall deliver to Buyer a statement showing in reasonable detail for the immediately preceding three (3) month time period (a) the computation of Net Operating Cash Flow; and (b) the volumes of Oil and gas produced and sold from the Interests. Additionally, Seller agrees to furnish Buyer with copies of any reserve reports prepared or obtained by Seller with respect to the Interests during the term of the Management Agreement; provided, that Seller shall not be required to furnish Buyer with more than one reserve report for the Interests in any one calendar year and Seller shall have no obligation to engage a third party engineer to prepare reserve reports for the Interests.

(iv)Maintain at all times financial security required by governmental bodies with jurisdiction over Seller or the Interests.

(v)Maintain at all times financial security for plugging and abandonment of Wells and remediation of the Interests and Property pursuant to the provisions of Section 9.08 of the ExxonMobil Agreement.

(vi)Maintain at all times at its sole cost and expense insurance policies sufficient to maintain general liability coverage of at least $5,000,000 in form and substance satisfactory to Buyer in which Buyer and its permitted assigns are named as additional insured parties and such policies are designated as primary and non-contributory. At the time of Closing and thereafter as may be requested from time to time, Seller shall furnish Buyer a certificate or certificates of insurance in form reasonably satisfactory to Buyer evidencing Seller’s compliance with the provisions of this subparagraph and which contain the unequivocal agreement on the part of the insurer to notify Buyer of the cancellation or any material changes of such coverage at least thirty (30) days before the effective date of such cancellation of change.

Remedies Upon Default. If, prior to the Termination Date, Seller shall fail to perform or observe any of the covenants, agreements or obligations herein provided to be performed or observed by Seller, Buyer, in addition to Buyer’s right to recover damages and all other remedies available to Buyer hereunder or at law or in equity, may, if such failure shall continue unremedied after ten (10) days from delivery to Seller of written notice thereof (unless within such ten (10) days, Seller has begun to cure such noncompliance in a manner satisfactory to Buyer and Seller continues to diligently pursue such curative actions until such failure is remedied to the satisfaction of Buyer), perform or cause to be performed such act at Seller's expense, in which event Buyer may expend funds for such purpose, and Buyer, upon written notice to Seller, shall be entitled to receive all proceeds payable to Seller pursuant to the Management Agreement to reimburse Buyer for any amounts so expended plus interest on any such amounts at the rate of twelve percent (12%) per annum from the dates such amounts were advanced by Buyer until the dates on which Buyer recovers said amounts from Seller. Additionally, Buyer shall be entitled to offset and reduce (i) any payments otherwise due and owing Seller under the Management Agreement, (ii) any amounts otherwise due and owing to Seller under the Bridge Note, and (iii) any amounts otherwise due and owing to Seller, under the provisions of this Agreement or the Management Agreement, to recover any amounts so advanced by Buyer plus interest thereon at the rate herein above stated. To secure all of the obligations owed by Seller to Buyer under the terms of this Agreement and the Management Agreement, Seller hereby grants, bargains, sells and assigns to Buyer a first and prior lien and security interest (a) upon Seller's option to reacquire the Interests pursuant to the Management Agreement, and (b) upon the Management Agreement (including, without limitation, oil and gas production attributable to the Interests pursuant to the Management Agreement, the proceeds from the sale of oil or gas at the wellhead, and all accounts relating thereto). To perfect the lien and security interest provided herein, Seller agrees to execute and acknowledge a recording supplement and/or financing statement prepared and submitted by Buyer in connection herewith or at any time following execution hereof. Further, Seller hereby authorizes Buyer to file this Agreement or any recording supplement executed in connection herewith as a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform Commercial Code in the state in which the Interests are located in order to perfect the security interests granted herein. Upon default by Seller with respect to any of its obligations hereunder and Seller's failure to remedy such default within ten (10) days of receipt of notice thereof as hereinabove provided, Buyer shall have the right, without prejudice to other rights or remedies, to suspend the Management Agreement, take possession and control of the Interests (to the exclusion of Seller) and to collect from the purchaser(s) of production from the Interests proceeds otherwise payable to Seller until the amount owed by Seller to Buyer plus interest at the rate hereinabove stated shall have been paid in full. Each purchaser shall be entitled to rely upon Buyer's written statement concerning the amount of any default.

Seller Reacquisition of the Interests. Seller shall reacquire the Interests pursuant to the provisions of the Management Agreement.

Seller Operation of the Interests. Upon Closing, Seller shall operate the Interests which are not operated by a third party as of the Effective Time pursuant to the Operating Agreement attached as Exhibit A to the Management Agreement.

Preservation of Existence. Seller will preserve and maintain its existence in its jurisdiction of organization and will also preserve and maintain its existence and good standing in each other state where it conducts business. Seller will not change its name or do business under any other name without, in each case, giving Buyer at least 30 days prior written notice thereof.

ARTICLE 6. TITLE AND TITLE DEFECTS

Title. Seller shall transfer title of the Interests to Buyer at Closing pursuant to an assignment substantially in the form of the Assignment attached hereto as Exhibit B, and said Assignment shall be adapted to the particular interest to be assigned and to conform to the provisions of Article 2 hereof. Seller will convey to Buyer Defensible title to the Interests on the Closing Date. Seller shall execute as many Assignments as are necessary to file for record Assignments in each jurisdiction and with each governmental authority where necessary to effect conveyance of the Interests and/or notice of such conveyance. Buyer shall be entitled to satisfy itself prior to Closing that it will be receiving conveyance of Defensible title to the Interests. Seller shall provide to Buyer full and complete access to its records and documents relating to the Interests. As used herein, the term " Defensible Title" shall mean, as to each of the Interests to be conveyed to Buyer, a net revenue interest which is not less, and a working interest which is not greater, than those set out in Exhibits A-1 and A-2 hereto with respect to such Interests, and a title which is free and clear of liens, encumbrances, defects or environmental Conditions, other than Permitted Encumbrances, which materially and adversely affect the value of such Interests. Any matter which causes an Interest not to have Defensible Title, and any environmental Condition, shall be considered to be a “Title Defect”. If Buyer determines that any Interest is subject to any Title Defects prior to Closing, Buyer shall notify Seller in writing describing the Title Defects, after which time the parties shall meet and exercise their best efforts to determine the validity of the claimed Title Defect. Seller shall have until the Closing to cure the Title Defects to the satisfaction of the Buyer. If Seller is not able to cure the Title Defects to Buyer’s reasonable satisfaction prior to Closing, then Buyer in its sole discretion may either (a) reduce the Purchase Price by the Allocation for the Interest with a Title Defect, (b) allow Seller 90 days after Closing to cure the Title Defects, (c) waive the Title Defects, or (d) terminate this Agreement. Should a Title Defect be discovered after the Closing Date, Seller shall undertake to cure such Title Defect to Buyer’s reasonable satisfaction; failing cure thereof, Buyer shall have the right, but not the obligation, to re-assign the affected Interest to Seller following the provisions of Section 9.03 hereof as to the Interest so affected.

Related Agreements. Except as otherwise provided in this Agreement, the sale of the Interests will be subject to all oil, gas, and mineral leases, assignments, subleases, farmout agreements, unit agreements, joint operating agreements, pooling agreements, letter agreements, easements, rights-of-way, gathering and transportation agreements, sales agreements, and other agreements concerning or pertaining to the Interests ("Related Agreements"), to the extent that they are binding on Seller or its successors or assigns. Buyer will assume all of Seller's obligations and liabilities under the Related Agreements as of the respective Effective Times, insofar as the obligations or liabilities concern or pertain to the respective Interests, and the parties will execute all documents necessary for Buyer to assume the Related Agreements. Buyer's obligation applies to all Related Agreements, whether recorded or not.

ARTICLE 7. PRE-CLOSING OBLIGATIONS

Preferential Rights.

(a) Notice. Seller will notify the owners, if any, of preferential rights to purchase the Interests.

(b) Adjustment to Base Purchase Price. If a third party gives notice of its intent to exercise a preferential right to purchase any of the Interests, Seller shall give immediate notice thereof to Buyer; in such event, Buyer may, at its option, elect to either (a) delay Closing as to all of the Interests pending closing of the preferential purchase, with no charge to either party for the delay, (b) terminate this Agreement, or (c) exclude the affected Interest and close as to all other Interests as scheduled..

(c) Third-Party Failure to Purchase. If a third party gives notice of its intent to exercise a preferential right to purchase a preferential right property, but does not close the purchase for any reason either before or within a reasonable time after the scheduled Closing of this Agreement, Buyer may elect, in its sole discretion, to acquire the preferential right property under the terms of this Agreement. In such event, Closing as to such property will be scheduled to occur within forty-five days after Buyer receives Seller's notice that the third party has not closed. The effective time for the preferential right property will be the applicable Effective Time under this Agreement for the Interest of which the preferential right property is a part.

Third-Party Notifications and Approvals. The sale of the Interests may require the approval or consent of lessors, joint interest owners, farmors, sublessors, Sellers, grantors, parties to agreements, governmental bodies having jurisdiction, or other third parties. Seller is responsible for obtaining approvals from all applicable third parties and will furnish Buyer with proof of each consent, approval, or waiver before the Closing Date. Seller will make reasonable efforts to obtain waivers of maintenance-of-uniform interest provisions, if any, from joint-interest owners. If Seller does not furnish Buyer with all third-party approvals applicable to any Interest, then Seller may, at its option, elect to (a) delay Closing as to any or all of the Interests, with no charge to either party for the delay, or (b) terminate this Agreement. To the extent any consent or approval is typically obtained after transfer of a given Interest, Seller agrees that it will exercise its best efforts to obtain such consent(s) or approval(s) within 30 days following the Closing, and in any event will obtain such consent(s) or approval(s) within the shortest practicable time after Closing. Buyer shall provide assistance to Seller’s efforts to obtain such consent(s) or approval(s).

ARTICLE 8. CLOSING

Closing Date. The Closing Date will be on or before May 4, 2005. Closing under this Agreement shall occur at the offices of Hughes, Hubbard & Reed, LLP, One Battery Park Plaza, New York, New York 10004-1482. If the parties agree, Closing may be handled by exchange of documents (by mail or by courier). No price adjustment will be made if Closing is delayed.

Buyer’s Right to Delay Closing. Buyer may, at its sole option and for any reason, delay Closing for up to thirty days after the originally-scheduled Closing Date, upon written notice to Seller.

Closing Obligations.

Certificates of Authority. Seller shall deliver to Buyer, at least five days before the Closing Date, certificates in form and substance satisfactory to Buyer, effective as of the Closing Date and executed by Seller’s duly authorized officer, partner, or owner, as appropriate, to the effect that (1) Seller has all requisite corporate, partnership, or other power and authority to purchase the Interests on the terms of this Agreement and to perform its other obligations under this Agreement and the Additional Instruments and has fulfilled all corporate, partnership, or other prerequisites to closing this transaction, and (2) each individual executing the closing documents has the authority to act on behalf of Seller.

Certificates of Insurance. Seller shall deliver certificates of insurance as provided by Section 5.02(b)(vi).

Change of Operatorship. For Interests that will be operated by Seller in its capacity as Manager under the Management Agreement and Operator under the Operating Agreements, and except to the extent waived by Buyer, Seller will deliver to Buyer on or before the Closing Date evidence of the following: (1) that Seller has complied with the requirements of all laws and regulations relating to the transfer of operatorship, including those regarding the assumption of responsibility for the plugging and abandoning of each Well that is included in the applicable Interests or located on the Property; (2) that the appropriate bond, surety letter, letter of credit, or other financial security has been accepted by the relevant regulatory agency; and (3) that Seller has, to the extent possible under applicable regulations, obtained all necessary permits or transfers of permits to operate the applicable Interests and Property.

Closing Settlement Statements. Seller will provide to Buyer (i) the Chandeleur Closing Settlement Statement, as same may have been revised pursuant to Section 3.04, and the Brazos, et al Closing Settlement Statement, each including items such as Base Purchase Price and adjustments to the Base Purchase Price (if any), to the extent this information is available at Closing. Seller will use estimates in the respective closing settlement statements, to the extent that estimates are necessary, and may correct the estimates in the final settlement statement.

Closing Documents. The parties, as indicated, will execute the following instruments to close this transaction:

(i)An instrument substantially in the form of the Assignment and Bill of Sale attached as Exhibit B, modified to the extent necessary to conform to the terms of this Agreement. The Assignment and Bill of Sale will be effective as of the Effective Time, be with special warranty of title, and restate the indemnities, releases, and waivers contained in this Agreement. Buyer may require the parties to execute separate instruments for each state, county, or other jurisdiction in which the Interests are located, or with respect to state or federal governmental jurisdiction to which the Interests are subject, to facilitate timely recording.

(ii)The Management Agreement;

(iii)The Operating Agreements;

(iv)Warrant Certificates, pursuant to the terms of the Management Agreement (the “Warrants”) and each such warrant certificate shall be in full force and effect;

(v)Other documents reasonably required to close this transaction and implement the terms of this Agreement, including deeds, bills of sale, and the like and instruments necessary under operating agreements, plans of unitization, laws, and regulations affecting the Interests to transfer the Interests and related obligations from Seller to Buyer;

(vi)Designation-of-Operator forms, or such other form as is required by governmental agencies with jurisdiction over the Interests or the Seller in its capacity as Operator for each Interest that Seller will operate after Closing pursuant to the Management Agreement, or in its capacity as Manager under the Management Agreement as to Interests operated by third parties; and

(vii)The closing settlement statements.

Third-Party Consents. Buyer will deliver proof of required third-party consents and approvals, except to the extent waived by Buyer in writing.

Payment to Seller. At Closing, (i) Buyer will pay to Manti and the other parties selling the Chandeleur Interests, for the account of Seller in its capacity as Buyer under the Manti Agreement, the net amount shown on the closing settlement statement related to the Chandeleur Interests, and (ii) as to the net amount shown on the Brazos, et al Closing Settlement Statement, in Buyer’s sole and unfettered discretion Buyer will either (A) offset amounts due under the Bridge Note, (B) pay Seller, or (C) any combination of the above. Cash payments hereunder shall be made by certified check, cashier's check, or funds transfer as that term is defined in Chapter 4 of the Texas Business and Commerce Code. The respective closing settlement statement amounts are subject to further adjustment after Closing as provided in this Agreement.

Delivery of Possession. Subject to the terms of applicable joint operating agreements, if any, the Related Agreements, and this Agreement, Seller will deliver possession of the Interests to Buyer as soon as practicable after the Effective Time or the Closing Date, whichever is later, whereupon Buyer shall deliver possession of the Interests to Seller in Seller’s capacity as Manager under the Management Agreement.

Condition Precedent. Seller’s performance of its obligations under this article is a condition precedent to Buyer’s obligation to close this transaction.

Seller’s Representation by Closing. By closing this transaction, Seller will be deemed to represent to Buyer that all Seller’s representations and warranties under this Agreement, the Additional Instruments, and the Manti Agreement are true as of the Closing Date.

ARTICLE 9. POST-CLOSING OBLIGATIONS

Filing and Recording. Buyer will file or record the conveyancing documents by which the Interests will be conveyed from Seller to Buyer in the appropriate governmental records and will provide either the original or photocopies of the filed or recorded document, including the recording data, to Seller. As to the Chandeleur Interests, Seller shall deliver to Buyer possession of the conveyancing documents related to the Manti Agreement, and Buyer shall promptly record same.

Further Assurances. Seller and Buyer each will, from time to time after Closing and upon reasonable request, execute, acknowledge, and deliver in proper form any conveyance, assignment, transfer, or other instrument reasonably necessary to accomplish the purposes of this Agreement.

Reassignment. If an event occurs pursuant to which ExxonMobil exercises its right under the ExxonMobil Agreement to have Seller reassign all or a portion of the High Island Interests to ExxonMobil, then the parties shall cooperate in good faith to unwind this transaction, as to the High Island Interests, within a reasonable time following ExxonMobil’s request for reassignment. Such unwinding shall return the parties as nearly as possible to the respective positions they held prior to execution of this Agreement. For reassignment of any High Island Interest under this Agreement, Buyer will execute and deliver to Seller a reassignment, without warranty of any kind (title, fitness, condition). Seller shall release and discharge Buyer and its Associated Parties, covenant not to sue Buyer or its Associated Parties, and indemnify, defend, and hold Buyer and its Associated Parties harmless as to any High Island Interests that are reassigned, and the reassignment instrument will restate Seller’s obligations.

Compliance. Buyer will comply with all rules, regulations, statutes, and laws applicable to Buyer's ownership of the Interests or Property and with all Related Agreements, insofar as they concern or pertain to the Interests. Seller will comply with all rules, regulations, statutes, and laws applicable to Seller’s management and operation of the Interests or Property and with all Related Agreements, insofar as they concern or pertain to the Interests.

Plugging and Abandoning Wells; Remediation. Seller recognizes, and will either perform or assure that performance is accomplished properly and in accordance with applicable law, the ExxonMobil Agreement, the Manti Agreement, and the respective Related Agreements, any and all of Buyer’s obligations to abandon, restore, and remediate the Interests and Property, whether arising before or after the Effective Time, including obligations, as applicable, to:

(a)  obtain plugging exceptions in Operator's name for each Well with a current plugging exception, or permanently plug and abandon the Well;

(b)plug, abandon, and if necessary, reabandon each Well;

(c)remove all equipment and facilities, including flowlines, pipelines, and platforms;

(d)close all pits; and

(e)restore the surface, subsurface, and offshore sites associated with the Interests or Property.

Seller will pay all costs and expenses associated with the obligations assumed under Section 9.08 of the ExxonMobil Agreement.

Surrender or Abandonment of Interests. If Buyer decides to surrender or abandon any of the Interests after Closing, Buyer must give Seller written notice of its intent at least forty-five days before surrender or abandonment.

ARTICLE 10. TAXES

Taxes - Chandeleur Interests. All ad valorem taxes, production taxes, and other taxes, as such terms apply under the Manti Agreement, shall be apportioned as provided for by said agreement for the account of Buyer. Seller shall pay any such taxes due and payable thereunder on behalf of Buyer in its capacity as Manager under the Management Agreement.

Taxes - Brazos, Galveston and High Island Interests. With respect to the Brazos Interests, the Galveston Interests, and the High Island Interests, any ad valorem, property, production, severance and similar taxes and assessments on said Interests shall be borne by Seller for all times prior to the Effective Time and by Buyer for all times after the Effective Time.

ARTICLE 11. OIL IN STORAGE, PROCEEDS, COSTS, EXPENSES,

CLAIMS, AND DISBURSEMENTS

Oil in Storage. All Oil in storage at the Effective Time, including working inventory, belongs to Seller. Title to Oil in storage both for Interests previously operated by Manti and Interests operated by others will transfer to Buyer as of the Effective Time. The term “Oil in storage” shall carry the definition set forth in Section 11.01 of the ExxonMobil Agreement, and Oil in storage shall be measured and valued in the same manner as it is measured and valued in Section 11.01 of the ExxonMobil Agreement.

Proceeds, Costs, and Expenses. All proceeds, receipts, credits, income, and charges attributable to the Interests and accruing after the Effective Time will be Buyer's property and responsibility. Seller shall fulfill, in its capacity as Manager under the Management Agreement, Buyer’s responsibilities for payments and disbursements after the Closing, including (a) any payments or disbursements made by ExxonMobil pursuant to Section 11.02 of the ExxonMobil Agreement, (b) any payments or disbursements made by Manti pursuant to Section 5.02 of the Manti Agreement, and (c) any charges allocated to Seller pursuant to Section 13.01 of the ExxonMobil Agreement.

Notice to Remitters of Proceeds. Seller will make reasonable efforts (a) to cause Manti to notify all remitters of proceeds from the sale of production from the Chandeleur Interests to advise them of this transaction and of the transaction contemplated by the Manti Agreement, and (b) to notify all remitters of proceeds from the sale of production from the Brazos Interests, the Galveston Interests, and the High Island Interests of this transaction, in each case to cause those remitters to remit proceeds to Seller as Buyer’s nominee pursuant to the Management Agreement. Notice to the remitters that this transaction has closed shall occur by letter-in-lieu-of-transfer order or other documents required by each remitter.

ARTICLE 12. OPERATION OF THE INTERESTS

Operation by Seller. Upon closing, operation of the Chandeleur Interests previously operated by Manti will be turned over to, and become the responsibility of, Seller on behalf of Buyer in its capacity as Manager under the Management Agreement. Seller shall continue as Operator of the Brazos Interests, the Galveston Interests, and the High Island Interests and shall operate those Interests on behalf of Buyer in its capacity as Manager under the Management Agreement.

Risk of Loss. Unless this Agreement is terminated as to an Interest, the risk of loss for damage to or destruction of the Interests and Property associated with the Interests will pass from Seller to Buyer as of the earlier of Closing or the Effective Time, INCLUDING DAMAGE OR DESTRUCTION RESULTING IN WHOLE OR IN PART FROM THE NEGLIGENCE OR STRICT LIABILITY OF SELLER OR ITS ASSOCIATED PARTIES. Damage or destruction will not be cause for Buyer to delay Closing or terminate this Agreement.

ARTICLE 13. BOND IN FAVOR OF EXXONMOBIL

Bond in Favor of ExxonMobil. Buyer has previously paid $2,000,000.00 the (“Bond Security”), to the indemnitor indemnifying the bond in favor of ExxonMobil that is provided for by the terms of Section 9.08 of the ExxonMobil Agreement, which bond is intended to secure obligations related to the High Island Interests to plug and abandon Wells, remove equipment and facilities, and restore the Property. Seller hereby assigns and pledges to Buyer for its benefit a security interest in and to all of such Debtor’s right, title and interest in and to the Bond Security (the “Collateral”).

Financing Statement. Seller hereby irrevocably authorizes Buyer at any time and from time to time to file in any filing office in any appropriate jurisdiction any initial financing statements, and amendments thereto, that: (a) indicate the Collateral, and (b) provide any other information required by part 5 of Article 9 of the Uniform Commercial Code, or other authority, of the State, or such other jurisdiction, for the sufficiency or filing office acceptance of any financing statement, or amendment, including whether Buyer is an organization, the type of organization and any organizational identification number issued to Buyer.

ARTICLE 14. PREFERENTIAL RIGHT TO PURCHASE OIL

Seller will not reserve any preferential right to purchase oil produced from the Interests. Buyer acknowledges the first right of refusal to purchase production from the Chandeleur Interests which is retained by Manti pursuant to Section 6.03 of the Manti Agreement.

ARTICLE 15. PREFERENTIAL RIGHT TO PURCHASE GAS

Seller will not reserve any preferential right to purchase gas produced from the Interests. Buyer acknowledges the first right of refusal to purchase production from the Chandeleur Interests which is retained by Manti pursuant to Section 6.03 of the Manti Agreement.

ARTICLE 16. SELLER'S RELEASE, DISCHARGE, AND COVENANT NOT TO SUE; SELLER'S OBLIGATIONS TO INDEMNIFY, DEFEND, AND HOLD HARMLESS; DISPUTE RESOLUTION

Seller's Release and Discharge of Buyer and its Associated Parties. Seller releases and discharges Buyer and its Associated Parties from each Claim and Liability relating to the Interests, Property, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S RELEASE AND DISCHARGE OF BUYER AND ITS ASSOCIATED PARTIES INCLUDE CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT, OR SOLE.The only exception to Seller's release and discharge of Buyer and its Associated Parties is stated in 16.04(e), and the release and discharge are binding on Seller and its successors and assigns other than Buyer.

Seller’s Covenant Not to Sue Buyer or its Associated Parties. Seller covenants not to sue Buyer or its Associated Parties with regard to any Claim or Liability relating to the Interests, Property, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S COVENANT NOT TO SUE BUYER OR ITS ASSOCIATED PARTIES INCLUDES CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE. The only exception to Seller's covenant not to sue Buyer or its Associated Parties is stated in Section 16.04 (e), and the covenant is binding on Seller and its successors and assigns other than Buyer.

Seller's Obligations to Indemnify, Defend, and Hold Buyer and its Associated Parties Harmless. Seller will indemnify, defend, and hold Buyer and its Associated Parties harmless from each Claim and Liability relating to the Interests, Property, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S OBLIGATIONS TO INDEMNIFY, DEFEND, AND HOLD BUYER AND ITS ASSOCIATED PARTIES HARMLESS INCLUDE CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.The only exception to Seller’s obligations to indemnify, defend, and hold Buyer and its Associated Parties harmless is stated in Section 16.04(c), and the obligations are binding on Seller and its successors and assigns other than Buyer.

Seller's Obligations.

(a) In each instance of Seller’s obligations to release, discharge, indemnify, defend, and hold Buyer and its Associated Parties harmless and its covenant not to sue Buyer or its Associated Parties, the Claims and Liabilities subject to the obligations include the following:

(i)the ownership of the Interests by Buyer, their operation by Buyer or its Associated Parties, and the acts or omissions of Buyer or its Associated Parties in connection with the Interests or the Related Agreements.

(ii)the ownership of the Interests by Buyer, their operation by Buyer or its Associated Parties, and the acts or omissions of Buyer or its Associated Parties in connection with the Interests or under this Agreement or the Related Agreements.

(iii)the acts or omissions of third parties relating to the Interests.

(b) Seller’s obligations under this Agreement to release, discharge, indemnify, defend, and hold Buyer and its Associated Parties harmless and its covenant not to sue Seller or its Associated Parties include Claims and Liabilities arising in any manner from the following:

(i)preferential and similar rights held by third parties to purchase any portion of the Interests.

(ii)the review, inspection, and assessment of the Interests and Property by Seller and its Associated Parties.

(iii)an error in describing the Interests or an error in the conveyancing instruments.

(iv)rights and obligations of the parties or third parties under the Related Agreements.

(v)closing without a third-party consent or approval.

(vi)failure by third parties to approve or consent to any aspect of this transaction after Closing.

(vii)obligations to plug and abandon Wells and remediate the Interests and Property.

(viii)payment of Real Property Taxes or other taxes applicable to the Interests and Property.

(ix)payments or disbursements paid or payable by Buyer or Seller to third parties.

(x)a physical or environmental condition relating to the Interests and Property, including Claims and Liabilities under the Environmental Laws, or failure to comply with the Environmental Laws.

(xi)remediation activities, including damages incurred by Buyer or its Associated Parties during or arising from remediation activities.

(xii)lawsuits filed before the Effective Time, but amended after the Effective Time to include the Interests or Property or Seller's ownership of or activities regarding the Interests or Property.

(c) Seller’s obligations to indemnify, defend, and hold Buyer and its Associated Parties harmless do not apply, however, to Claims or Liabilities that result from a judgment rendered or settlement reached in a lawsuit filed before the Effective Time, but only to the extent that acts or omissions that gave rise to the cause of action are attributable to the conduct or operation or ownership of Seller or its Associated Parties before the Effective Time.

(d) The parties recognize that certain lawsuits may have been filed before the Effective Time, but concern activities continuing after the Effective Time, so that after Closing Buyer may be a proper party to the lawsuit. For these lawsuits, Seller’s obligations to indemnify, defend, and hold Buyer and its Associated Parties harmless will apply to activities occurring before the Effective Time.

(e) Seller’s release and discharge of Buyer and its Associated Parties and its obligation to indemnify, defend and hold Buyer harmless under this Agreement does not include Claims that Buyer breached this Agreement. Any such Claims will be resolved in accordance with Article 16.06.

Seller’s Duty to Defend. Seller acknowledges that its obligations to indemnify, defend, and hold Buyer and its Associated Parties harmless under this Agreement include obligations to pay the attorneys' fees and court and other costs incurred by Buyer and its Associated parties in defending all Claims. As to each Claim and Liability, Buyer, at its sole option, may elect to (a) manage its own defense, in which event Seller will reimburse Buyer and its Associated Parties for all reasonable attorneys' fees and court and other costs reasonably incurred in defending a claim, upon delivery to Seller of invoices for these fees and costs, provided that Buyer’s selection of counsel is acceptable to Seller; or (b) tender its defense as to any Claim to Seller, in which event Seller will be responsible for all aspects of defending the Claim at issue and resulting Liabilities.

Alternate Dispute Resolution and Arbitration. This section applies to any dispute between the parties, arising at any time, that is not subject to Seller’s release and discharge of Buyer and its Associated Parties or Seller’s covenant not to sue Seller or its Associated Parties or is not specifically excluded under this section. Whether a dispute is subject to Seller’s release, discharge, or covenant not to sue or to this section (or is excluded from this section by its terms), and whether there is a contract between the parties, are issues that will be resolved under the alternate dispute resolution and arbitration provisions of this section.

As to the disputes subject to this section, any Claim or controversy of whatever nature, including an action in tort or contract or a statutory action ("Disputed Claim"), or the arbitrability of a Disputed Claim, will be resolved in arbitration under the rules of the American Arbitration Association and will be binding on both parties and their respective successors and assigns. Neither party may prosecute or commence any suit or action against the other party relating to any matters that are subject to this section.

Buyer will determine, at its sole option, whether a Claim filed by a third party against Buyer or Seller will be subject to this section. If Seller has notified Buyer before Closing of a Disputed Claim by Seller before Closing and the Disputed Claim is not resolved before Closing, the Disputed Claim will not be subject to this section unless agreed by the parties.

Retroactive Effect. Seller acknowledges that its obligations to release, discharge, defend, and hold Buyer and its Associated Parties harmless and its covenant not to sue Buyer or its Associated Parties apply to matters occurring or arising before the Execution Date to the extent provided in this Agreement.

INDUCEMENT TO BUYER.SELLER ACKNOWLEDGES THAT IT EVALUATED ITS OBLIGATIONS UNDER THIS ARTICLE BEFORE IT OFFERED TO SELL THE INTERESTS AND THAT ITS ASSUMPTION OF THESE OBLIGATIONS, ALONG WITH SELLER’S REPRESENTATIONS AND WARRANTIES IN ARTICLE 4, ARE A MATERIAL INDUCEMENT TO BUYER TO ENTER INTO THIS AGREEMENT WITH, AND CLOSE THE PURCHASE FROM, SELLER.

ARTICLE 17. ENVIRONMENTAL MATTERS

Acknowledgment Concerning Possible Contamination of the Interests and Property. Buyer and Seller are 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. NORM may affix or attach itself to the inside of Wells, materials, and equipment as scale, or in other forms; the Wells, materials, and equipment located on the Property or included in the Interests may contain NORM and other wastes or hazardous substances; and NORM-containing material and other wastes or hazardous substances may have been buried, come in contact with the soil, or otherwise been disposed of on the Property. Special procedures may be required for the remediation, removal, transportation, or disposal of wastes, asbestos, hazardous substances, and NORM from the Interests and the Property.

Seller Assumption of Environmental Liabilities. SELLER 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.

ARTICLE 18. BUYER'S REPRESENTATIONS AND COVENANTS

Buyer represents and warrants to Seller that as the date hereof:

Organization. Buyer is duly organized, validly existing and in good standing under the laws of its own jurisdiction of organization.

Power and Authority; Authorization; Enforceability; No Conflicts; Etc.

(a) Buyer has all requisite power and authority to execute and deliver this Agreement and the Additional Instruments to which it is a party and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

(b) The execution, delivery and performance by Buyer of this Agreement and the Additional Instruments to which it is a party and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all requisite action of Buyer.

(c) The Agreement has been, and the other Additional Instruments to which Buyer is a party have been duly and validly executed and delivered by Buyer and constitutes the legal, valid and binding obligations of Buyer, enforceable against it in accordance with their respective terms.

(d) The execution and delivery by Buyer of this Agreement and of each of the Additional Instruments to which it is a party, the performance by it of its obligations hereunder and thereunder and the consummation by it of the transactions contemplated hereby and thereby do not:

(i)violate any provisions of the limited partnership agreement of Buyer;

(ii)result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any agreement to which Buyer is a party or by which the properties or assets of Buyer may be bound or otherwise subject; or

(iii)contravene or violate any laws applicable to Buyer.

(e) No prior or subsequent filing or registration with, notification to, or authorization, consent or approval of, any governmental or regulatory agency is required to be made or obtained by Buyer in connection with the execution, delivery and performance of this Agreement by Buyer or any of the other Additional Instruments to which Buyer is a party or the consummation by Buyer of the transactions contemplated hereby and thereby.

Securities Laws.

(a) Buyer acknowledges that the solicitation of an offer for and the sale of Interests by Seller has not been registered under any securities laws.

(b) Buyer intends to acquire the Interests for its own benefit and account and is not acquiring the Interests with the intent of distributing fractional undivided interests in them or otherwise selling them in a manner that would be subject to regulation by federal or state securities laws. If Buyer sells, transfers, or otherwise disposes of the Interests or fractional undivided interests in them in the future, it will do so in compliance with applicable federal and state laws.

(c) Buyer represents that at no time has it been presented with or solicited by or through any public promotion or other form of advertising in connection with this transaction.

Seller Qualification. Seller shall, prior to Closing, obtain such governmental qualifications as are necessary to own and receive an assignment of the Interests.

ARTICLE 19. GAS IMBALANCES

Seller's and Buyer's Respective Obligations. For those Interests with cumulative gas-production-imbalance accounts among working interest owners, Buyer acknowledges that the amounts are derived from either Seller’s or Operator's statements based upon current production, prior sales history, and contract information; were provided to Buyer before the Execution Date; and were taken into consideration in Buyer's calculation of the Base Purchase Price and the Allocations. After the Effective Time, all benefits, obligations, and liabilities associated with these gas-production-imbalance accounts and related agreements will accrue to and become Buyer's responsibility. Buyer will assume Seller's overproduced or underproduced position as of the Effective Time and subject to the other provisions of this Agreement, unless the operating agreement, plan of unitization, or gas balancing agreement for an Interest provides for the cash settlement of gas-production-imbalance accounts when the Interest is assigned, in which event Seller reserves the gas-production-imbalance account and the right to the cash settlement.

Settlement of gas imbalances shall be treated in the same manner as in Article 19 of the ExxonMobil Agreement, and Seller shall act in that regard on behalf of Buyer in its capacity as Manager under the Management Agreement.

ARTICLE 20. FINAL SETTLEMENT STATEMENT

Preparation. Seller will prepare a final settlement statement relating to the Interests and submit it to Buyer within 150 days after the Closing Date. The final settlement statement will deduct royalties, operating expenses, taxes, overhead, and other amounts due to Seller from amounts due to Buyer as provided in this Agreement, with adjustments as necessary for items identified after Closing.

Final Settlement. Buyer must respond in writing with objections and proposed corrections within thirty days of receiving the final settlement statement relating to the Interests. If the parties cannot resolve their differences within ninety days of Seller's receipt of Buyer's objections, then the alternate-dispute-resolution and arbitration procedures of this Agreement will be triggered. If Buyer does not respond to the final settlement statement by signing or objecting in writing within the thirty-day period, the statement will be deemed approved by Buyer. After approval of said final settlement statement, Seller will send a check or invoice to Buyer for the net amount.

ARTICLE 21. BROKER'S AND FINDER'S FEES

Seller and Buyer each represents and warrants to the other that it has incurred no liability, contingent or otherwise, for broker's or finder's fees in connection with this Agreement or the transaction contemplated by it for which the other party will have any responsibility.

ARTICLE 22. COMMUNICATIONS

Unless otherwise provided in this Agreement, communications (including notices) under this Agreement that must be in writing and delivered by a specified date will be deemed to have been made when received at the following addresses by registered or certified mail, postage prepaid, or by messenger:

Seller:	Buyer:
Capco Offshore, Inc. 5555 San Felipe, Suite 725 Houston, Texas 77056 Attention: Mike Myers	Hoactzin Partners, L.P. 87 South Saxon Avenue Bay Shore, New York 11706 Attention: Peter Salas

ARTICLE 23. SELLER’S DEFAULT

If Seller defaults under this Agreement in a material way, including Seller's failure to perform its obligations to close this transaction, Buyer may, at its sole option, terminate this Agreement in addition to all of its other rights at law or in equity.

ARTICLE 24. HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS

ACT OF 1976

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

ARTICLE 25. MISCELLANEOUS

Entire Agreement. This Agreement and the Additional Instruments constitute the entire agreement between the parties as to the transaction described in this Agreement. All previous negotiations and communications between the parties as to these matters are merged into this Agreement and the Additional Instruments.

Successors and Assigns; Amendment; Survival. This Agreement is binding on and inures to the benefit of the parties and their respective successors, heirs, representatives, and assigns and may be supplemented, altered, amended, modified, or revoked only in writing signed by both parties. Neither the assignment of this Agreement nor of the Interests or any part of them will relieve Seller of its obligations under this Agreement unless and to the extent Buyer consents in writing to release Seller, which consent may be withheld for any reason.

All provisions of this Agreement and the Additional Instruments that cannot be performed before Closing or the earlier termination of this Agreement and all representations, promises, releases, and indemnities under this Agreement and the Additional Instruments will survive Closing or the earlier termination of this Agreement.

Choice of Law. This Agreement and its performance will be construed in accordance with, and enforced under, the internal laws of the State of Texas, without regard to choice of law rules of any jurisdiction, including Texas.

Assignment. Neither this Agreement nor the rights and obligations under it may be assigned or delegated by either party without the other party’s prior written consent, which consent may be withheld for any reason, and an attempted assignment or delegation in the absence of such consent is void.

No Admissions. Neither this Agreement, nor any part of it, nor any performance under this Agreement, nor any payment of any amount under this Agreement will constitute or may be construed as a finding, evidence of, or an admission or acknowledgment of any liability, fault, past or present wrongdoing, or violation of law, rule, regulation, or policy, by either Seller or Buyer or their respective Associated Parties.

No Third-Party Beneficiaries. There are no third-party beneficiaries of this Agreement.

Public Communications. Unless provided otherwise in this Agreement, neither party will make any press release or public communication concerning this transaction without the other party’s prior written consent, which consent may be withheld for any reason.

Headings and Titles. The headings and titles in this Agreement are for guidance and convenience of reference only and do not limit or otherwise affect or interpret the terms or provisions of this Agreement.

Exhibits. All exhibits referenced in and attached to this Agreement are incorporated into it.

Includes. The word "includes" and its syntactical variants mean "includes, but is not limited to" and corresponding syntactical variants. The rule ejusdem generis may not be invoked to restrict or limit the scope of the general term or phrase followed or preceded by an enumeration of particular examples.

Severability. If any provision of this Agreement is found to be illegal or unenforceable, the other terms of this Agreement shall remain in effect, and this Agreement shall be construed as if the illegal or unenforceable provision had not been included.

Counterparts. This Agreement may be executed in multiple counterparts, all of which together will be considered one instrument.

Conflicts. If the text of this Agreement conflicts with the terms of any exhibit to this Agreement, then the text of this Agreement will control. Further, in the event of a conflict between the terms of the Management Agreement and the terms of the Operating Agreement, the terms of the Management Agreement shall control.

Not to Be Construed against the Drafter. Seller acknowledges that it has read this Agreement, has had opportunity to review it with an attorney of its choice, and has agreed to all of its terms. Under these circumstances, the parties agree that the rule of construction that a contract be construed against the drafter may not be applied in interpreting this Agreement.

No Waiver. No waiver by either party of any part of this Agreement will be deemed to be a waiver of any other part of this Agreement or a waiver of strict performance of the waived part in the future.

CONSPICUOUSNESS.  THE PARTIES ACKNOWLEDGE THAT THE PROVISIONS OF THIS AGREEMENT THAT ARE PRINTED IN THE SAME MANNER AS THIS SECTION ARE CONSPICUOUS.

Execution by the Parties. Neither the submission of this instrument for Seller’s examination, nor discussions or negotiations between the parties, constitutes an offer to purchase the Interests or Property, and this instrument and the underlying transaction will become enforceable and binding between the parties only upon execution and delivery of this instrument by both Seller and Buyer.

The parties have executed this Agreement on the date below their signatures, to be enforceable and binding as of the Execution Date.

CAPCO OFFSHORE, INC.	HOACTZIN PARTNERS, L.P.
By:	By:	Dolphin Advisors, LLC
Mike Myers, President		Its General Partner
	By:	Dolphin Management, Inc.
Date:		Its Managing Member
	By:
		Peter Salas, President
	Date:

EXHIBIT A-1

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO ENERGY, INC. AND --CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

DESCRIPTION OF THE BRAZOS INTERESTS

30% OF 8/8THS WORKING INTEREST, AND A PROPORTIONATE NET REVENUE INTEREST, AS OF THE EFFECTIVE TIME, IN AND TO THE FOLLOWING LEASES, INSOFAR ONLY AS SAID LEASES COVER AND INCLUDE THE WELLBORES OF THE WELLS LISTED BELOW AND ONLY TO THE EXTENT THAT SUCH LEASS ARE NECESSARY TO PRODUCE OIL AND/OR GAS FROM THE WELLBORES OF SAID WELLS, TOGETHER WITH A LIKE INTEREST IN THE EASEMENTS DESCRIBED BELOW:

BRAZOS 440L/441L/406L/407L

State Lease 57646, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SE/4 of State Tract 441L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 581.

State Lease 57645, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NE/4 of State Tract 441L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 577.

State Lease 57644, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SW/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 573.

State Lease 57642, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NW/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 569.

State Lease 57641, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NE/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 565.

State Lease 60732, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective April 4, 1967, and covering SE/4 of State Tract 406L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 453 at Page 245.

State Lease 57633, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SE/4 of State Tract 407L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 544.

State Lease 57634, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SW/4 of State Tract 407L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 565.

INSOFAR AND ONLY INSOFAR as the above leases are included within the 440L Unit more fully described as the following:

5,850.00 acres of land out of Tracts 407L, 406L, 441L, and 440L as shown on the Texas Gulf Coast Map, Sheet 3, from the Sabine River to the Rio Grande River as subdivided for Mineral Development by the General Land Office, dated January 1967, and the 5,850.00 acres of land being more particularly described as follows:

1350 acres out of State Tract 407L, being all of the south half (S 1/2) of the southeast quarter (SE 1/4) of Tract 407L, all of the southeast one-quarter (SE 1/4) of the southwest one-quarter (SW 1/4) of Tract 407L, all of the south one-half (S 1/2) of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 407L, and all of the northeast one-quarter (NE 1/4) of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 407L.

90 acres out of State Tract 406L, and being all of the southeast one-quarter (SE/4) of the southeast one-quarter (SE/4) of the southeast one-quarter (SE/4) of State Tract 406L.

1620 acres out of State Tract 441L, and being all of the north one-half (N 1/2) of the southeast one-quarter (SE 1/4) of State Tract 441L, all of the south one-quarter (S 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all the northeast one-quarter (NE1/4) of southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all of the north one-half (N 1/2) of the southeast one-quarter (SE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all of the south one-half (S 1/2) of the northeast one-quarter (NE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, and all of the northeast one-quarter (NE 1/4) of the northeast one-quarter (NE1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L.

2790.00 acres out of State Tract 440L, and being all of the north one-quarter (N 1/4) of State Tract 440L, all of the south one-half (S 1/2) of the northwest one-quarter (NW 1/4) of State Tract 440L, all the north one-half (N 1/2) of the southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the northwest one-quarter (NW 1/4) of the southeast one-quarter (SE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the north one-half (N 1/2) of the northwest one-quarter (NW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 440L, and all of the southwest one-quarter (SW 1/4) of the northwest one-quarter (NW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 440L.

The above described unit is limited to all gas sands encountered in the interval between 6,580 feet and 7,860 feet, as shown on the induction-electrical log run in the Shell Oil Company’s well No. 2 located in the northwest one-quarter (NW 1/4) of State Tract 440L.

WELLS

Well Name		CAPCO Working Interest	CAPCO Net Revenue Interest
Brazos 440L	I-1	65.00%	53.51666%
Brazos 440L	4012	65.00%	53.51666%
OPTION WELL
Brazos 440L	A-1	65.00%	53.51666%

State Easement ME 85-234, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 3 ½ inch pipeline.

State Easement ME 85-233, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 4 ½ inch pipeline.

State Easement ME 85-169, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 12.75” pipeline.

BRAZOS 478L/479L

State Lease 96177, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and American Exploration Company, as Lessee, effective October 4, 1994, and covering north of the three marine league line within State Tract 478L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 950452 at Page 400941.

State Lease 97270, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and American Exploration Company, as Lessee, effective April 2, 1996, and covering S/2 of NE/4 of State Tract 479L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 963560 at Page 442494.

WELLS

Name	CAPCO Working Interest	CAPCO\ Net Revenue Interest
Brazos 478L #2	65.00%	49.725%

State Easement ME 970029, granted by the State of Texas, General Land Office, unto American Exploration Company for a 30’ wide easement.

State Easement ME 970031,granted by the State of Texas, General Land Office, for the 478L #2 well.

EXHIBIT A-2

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

DESCRIPTION OF THE CHANDELEUR INTERESTS

Schedule of Wells

Well Name	API	Operator	Working Interest	Net Revenue Interest
CA Blk. 30 #1 (Hustler)	1772840058	Capco	1.000	0.79833333
CA Blk. 30 #3 (Seamaster)	1772840060	Capco	1.000	0.79833333
CA Blk. 27 #2 (Fireball)	1772840062	Capco	1.000	0.77892924
Biloxi Marsh LC #1-2	1708720315	MERIDIAN	0.145357	0.106111
PXP SL 17656 #2 (Fiesta)	1708720327	PXP	0.4375	0.328125
PXP CA 30 #2 (Hustler West)	1772840059	PXP	0.4375	0.3764583
PXP SL 17812 #1 (Avenger)	1773020034	PXP	0.4375	0.328125
PXP SL 17389 #1 (Prowler)	1773020036	PXP	0.4375	0.338125
PXP SL 17388#1 (Catalina)	1773020035	PXP	0.4375	0.338125
PXP SL 17387#1 (Skyraider Dp.)	1773020038	PXP	0.4375	0.338125
PXP SL 17390#1 (Twin Otter)	1772720532	PXP	0.4375	0.338125

Schedule of Leases

LEASES

LESSOR	LESSEE	DATE	RECORDING INFO.
USA-Mineral Management Service- OCS-G 24002***	Manti Resources, Inc.	5/1/2002	N/A
State of Louisiana - No. 17365	Kalar Corporation	3/18/2002	COB 717, Folio 339/MLB 116,Folio 6, Entry 397916, St. Bernard Parish, LA
USA-Mineral Management Service- OCS-G 24001***	Manti Resources, Inc.	5/1/2002	N/A
Mabel Isabel Molero Quatroy, et al *	Manti Resources, Inc.	5/9/2001	COB 696, Folio 731/MLB 113, Entry #384834, St. Bernard Parish, LA
LAC Real Estate Holdings, L.L.C.*	Louisiana Oil and Gas, Inc.	5/3/2001	COB 696, Folio 724/MLB 113, Entry #384833, St. Bernard Parish, LA
Biloxi Marsh Lands Corporation*	White Mountain Royalty Corporation	10/26/2000	Memo-COB 694,MLB 112,Entry 383297, St. Bernard Parish, LA
State of Louisiana - No. 17656	WLB Investments, Inc.	11/18/2002	COB 730, Folio 182/MLB 118, Folio 98, Entry #406251, St. Bernard Parish, LA, NA # 03-03420, Instrument # 251353, Orleans Parish, LA.
State of Louisiana - No. 17812	Manti Jamba,Ltd.,et al	5/19/2003	COB 738, Folio 793/MLB 121, Folio 54, Entry #413799, St. Bernard Parish, LA
State of Louisiana - No. 17389	Kalar Corporation	3/18/2002	COB 717, Folio 387/MLB 116, Folio 10, Entry #397920, St. Bernard Parish, LA
State of Louisiana - No. 17388	Kalar Corporation	3/18/2002	COB 717, Folio 375/MLB 116, Folio 9, Entry #397919, St. Bernard Parish, LA
State of Louisiana - No. 17387**	Kalar Corporation	3/18/2002	COB 717, Folio 363/MLB 116, Folio 8, Entry #397918, St. Bernard Parish, LA
State of Louisiana - No. 17390	Kalar Corporation	3/18/2002	COB 717, Folio, 399,/MLB 116, Folio 11, Entry #397921, St. Bernard Parish, LA

* = INSOFAR AND ONLY INSOFAR as said leases fall within the confines of unit tract numbers 1A and 1B within the CRIS 1 RA SUC, established by Office of Conservation Order No. 960-A-2, effective April 9, 2002, and approved by the Office of Conservation on November 4, 2003.

** = LESS AND EXCEPT measured depths from the surface of the earth down to the stratigraphic equivalent of the bottom of the producing sand found between the depths of 4,926' and 5,018' in the Manti Operating Company State Lease No. 17387 No. 1 Well situated thereon.

***Subject to a 3.5% overriding royalty interest, in favor of J. Michael Poole, Sr., pursuant to Article 4.01 in that certain Exploration Joint Venture Agreement between Manti Resources, Inc., and Sunbelt Energy, Ltd., et al, dated May 1, 2001. 

[*] SAVE AND EXCEPT that certain royalty interest purchased from Biloxi Marsh Lands Corporation in favor of Manti Operating Company, effective May 24, 2001, recorded in COB 696, MLB 113, Entry No. 384864, in the official records of St. Bernard Parish, Louisiana.

Rights of Ways/Easements

PIPELINE SEGMENT NO.	SIZE (IN.)	LENGTH (FT.)	FROM	TO
14390	4	385	Well #2, Chandeleur Area, Blk. 30 -OCS-G 24002	6-inch SSTI, Chandeleur Area, Blk. 30 - OCS-G 24002
14391	4	529	Well #3, Chandeleur Area, Blk. 30 -OCS-G 24002	6-inch SSTI, Chandeleur Area, Blk. 30 - OCS-G 24002
14519	4	8,501	Caisson No. 3, Chandeleur Area, Blk.27 - OCS-G 24001	Caisson No. 2, Chandeleur Area, Blk. 27 - OCS-G 24001
14388 - ROW No. G25321	6	18,225	Caisson #1, Chandeleur Area, Blk. 30 - OCS-G 24002	Platform A, Chandeleur Area, Blk. 29 - OCS-G 05740
14529 - ROW No. G25347	6.6	10,748	Chandeleur Blk. 27 Caisson No. 2 - OCS-G 24001	Chandeleur Blk. 29 Platform "B" - OCS-G 05740
14530 - ROW No. G25348	4	10,788	Caisson #2, Chandeleur Area, Blk. 27 - OCS-G 24001	Platform B, Chandeleur Area, Blk. 29 - OCS-G 05740

ALL OF THE ABOVE PIPELINE SEGMENTS AND RIGHT-OF-WAYS ARE TAKEN FROM THE UNITED STATES OF AMERICA MINERAL MANAGEMENT SERVICE.

LEASE DATE	LESSOR	LESSEE	PARISH	ENTRY	BOOK	PAGE
12/19/03	State of Louisiana ROW 4428	PXP Gulf Coast Inc	St. Bernard	422745	751	404
01/09/04	State of Louisiana ROW 4444	PXP Gulf Coast Inc	St. Bernard	424062	753	55
04/27/04	State of Louisiana ROW 4469	PXP Gulf Coast Inc	St. Bernard	427803	758	39
6/22/2004	State of Louisiana ROW 4509	PXP Gulf Coast Inc	St. Bernard	429903	760	519

EXHIBIT A-3

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

DESCRIPTION OF THE GALVESTON INTERESTS

LEASES
A.	Serial No.:	OCS-G 21324
	Date:	December 1, 1999
	Lessee:	Union Oil of California
	Land Covered:	Galveston Area Block 297, OCS Leasing Map, Texas Map No. 6, containing approximately 5760 acres.
B.	Serial No.:	OGS-G 25534
	Date:	November 1, 2003
	Lessee:	Fidelity Exploration & Production Company, et al.
	Land Covered:	Galveston Area Block 287, OCS Leasing Map, Texas Map No. 6, containing approximately 5760 acres.
C.	Serial No.:	OCS-G 25536
	Date:	October 1, 2003
	Lessee:	Gryphon Exploration Company
	Land Covered:	Insofar only as to the E/2 NE/4 Galveston Area Block 298, OCS Leasing Map, Texas Map No. 6,
		containing approximately 720 acres.

*Prospect Payout is defined in that certain Offshore Prospect Participation Agreement dated August 18, 1999, as amended December 30, 2004, between Capco Offshore, Inc., and Fidelity Exploration, et al.

Wells

	Buyer’s	Buyer’s
Name	Working Interest	Net Revenue Interest
GA 297 #1	30.00% WI - BPO	30% x 5/6 NRI - BPO*
	25.50% WI - APO	25.5% x 5/6 NRI - APO*

*Subject to and bearing its proportionate part of all existing overriding royalties, carried interests, and other burdens on production reflected of record or disclosed in that certain Offshore Prospect Participation Agreement dated December 30, 2004, Between Capco Offshore, Inc. and Fidelity Exploration Company, Inc., et al. 

SUBJECT TO THE FOLLOWING PRIOR AGREEMENT

That certain Offshore Prospect Participation Agreement dated August 18, 1999, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company, as amended Dec. 30, 2004, covering all of Galveston Area Blocks 287, 297, and the E/2NE of Galveston Area Block 298.

SUBJECT TO THE FOLLOWING BURDENS

1. Overriding Royalty Interest in favor of Gryphon Exploration Company as set forth in that certain Letter Agreement dated October 1, 2004, by and between Fidelity Exploration & Production Company and Gryphon Exploration Company equal to 3.0% of 6/6^th covering the NW/4 of Galveston Area Block 297 and the E/2NE of Galveston Area Block 298.

2. After Prospect Payout Overriding Royalty Interest in favor of Blue Dolphin Petroleum Company as set forth in that certain Offshore Prospect Participation Agreement dated December 30, 2004, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company equal to 2.0% of 6/6^th covering all of Galveston Area Block 287, and 2.5% of 6/6ths covering all of Galveston Area Block 297.

3. After Prospect Payout Reversionary Interest in favor of Fidelity Exploration & Production Company and Blue Dolphin Petroleum Company as set forth in that certain Offshore Prospect Participation Agreement dated December 30, 2004, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company equal to 7.50% of 6/6^th each, covering all of Galveston Area Blocks 287, 297 and E/2NE of Galveston Area Block 298.

EXHIBIT A-4

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

DESCRIPTION OF THE HIGH ISLAND INTERESTS

B. HIGH ISLAND INTERESTS

Lease No.:	OCS-G 06168
Lessor:	The United States of America
Lessee:	Exxon Corporation
Effective Date:	October 1, 1983
Lands Covered:	All of Block 196, High Island Area, OCS Leasing Map, Texas Map No. 7, LESS AND EXCEPT in the N/2, SW/4, and W/2SE/4 the Operating Rights in all depths below the base of the stratigraphic equivalent of the MM5 sand found at 12,430' MD and 9,484 TVD in the OCS-G 06168, No. B-2 Well, (API 427084034900), and LESS AND EXCEPT in the E/2SE/4 the Operating Rights as to all depths.
Interest:	Record Title Interest 100.00%,
	Net Revenue Interest BPO 78.33333%; APO 83.33333%
	The Before Payout (“BPO”) net revenue interest shown above reflects a 5.0% of 8/8ths overriding royalty retained by ExxonMobil as to which payout occurs once an aggregate $1,500,000 has been paid; thus, the After Payout (“APO”) net revenue interest is stated. This Interest also is subject to the Retained Revenue Interest, in favor of ExxonMobil, provided for by Section 3.04(b) of the ExxonMobil Agreement.

PIPELINE RIGHT-OF-WAY
	Right-of-way No.:	1027360 - OCS-G 21466
	Grantor:	The United States of America
	Grantee:	Exxon Mobil Corporation

Effective Date:	February 22, 2001
Right-of-way Description:	OCS-G 21466, Segment No. 12379 Pipeline Right-of-way for 10-3/4 inch pipeline from HI 176 "B" Platform to a side tap SSTI on Williams Field Services - Offshore Gathering Company's Existing 12 inch Pipeline (OCS-G 12370 - Segment 13143, formerly 9208) in Block 177.
Interest:	100.00%

RIGHT-OF-USE AND EASEMENT PLATFORM "B" HIGH ISLAND BLOCK 176
	Right-of-use and easement No.:	Formerly 1029764 - OCS-G 23586 - to be determined after Closing
	Grantor:	The United States of America
	Grantee:	Formerly Exxon Mobil Corporation - to be Capco Offshore after Closing
	Effective Date:	Formerly March 10, 2003 - to be determined after Closing
	Right-of-use and easement description:	OCS-G 23586 - Right-of-use and easement to maintain Platform B in High Island, Block 176, expired lease, for the purposes of producing Wells B-1, B-2, B-3, and B-2d (sidetrack), High Island, Block 196, OCS-G 06168.
2.	Interest:	100%

 

SUBJECT TO THE FOLLOWING CONTRACTS
1.	Contract No.:	1001917 - Operating Agreement
	Parties:	Hall-Houston Oil Company and Exxon Corporation
	Effective Date:	September 1, 1988
	Lands Covered:	Covering High Island Block 176, Offshore Texas.
2.	Contract No.:	1001939 - Farmout Agreement
	Parties:	Hall-Houston Oil Company and Exxon Corporation
	Effective Date:	September 1, 1988
	Lands Covered:	Covering High Island Block 195, Offshore Texas.
3.	Contract No.:	0408358-001 - Platform and Facilities Agreement

	Parties:	Hall-Houston, Exxon Corporation et al
	Effective Date:	September 1, 1988
	Lands Covered:	Platform "A" (Platform ID No. 10468-1) located on High Island Block 176, including but not limited to the compressors, the facilities and the 10" sales line from Platform "A", High Island Block 176 to the subsea tap valve located in High Island Block 140 on Transco's 24" pipeline.
4.	Contract No.:	1029891 - Farmout Agreement
	Parties:	Exxon Mobil Corporation and Spinnaker Exploration Oil Company
	Effective Date:	May 30, 2003
	Lands Covered:	SE/4SE/4 High Island Block 196, OCS-G 06168
5.	Contract No.:	210466000 - Lateral Line Interconnect, Platform Use and Operation Agreement
	Parties:	WFS - Offshore Gathering Company, Seller Production Company and Apache Corporation
	Effective Date:	March 1, 2001
	Lands Covered:	The HI 176 B & C Gas Gathering System, being the pipeline from the base of the HI 176 B and HI 176 C risers to the WFS underwater tie-in assembly located in HI 177.
6.	Contract No.:	210466000-1 - Letter Agreement - Construction and Operation of Gathering Pipeline, High Island Block 176 and 177
	Parties:	Seller Production Company, Apache Corporation, Forcenergy Inc. and Ridgewood Energy Corporation
	Effective Date:	October 10, 2000
	Lands Covered:	The HI 176 B & C Gas Gathering System, being the pipeline from the base of the HI 176 B and HI 176 C risers to the WFS underwater tie-in assembly located in HI 177.
SUBJECT TO THE FOLLOWING PIPELINE RIGHTS-OF-WAY
1.	Pipelines:	0404358-002
		Pipeline Right-of-Way OCS-G 10515, Segment No. 8569
		0408360-002
		Pipeline Right-of-Way OCS-G 11186, Segment No. 8943
		0408360-003
		Pipeline Right-of-Way OCS-G 11156, Segment No. 8705
		0408360-004
		Pipeline Segment No. 11303

EXHIBIT B

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO ENERGY, INC. AND CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

FORM OF

ASSIGNMENT AND BILL OF SALE

STATE OF TEXAS	§
COUNTIES OF MATAGORDA,	§
BRAZOS, GALVESTON,	§
BRAZORIA, CHAMBERS &	§
JEFFERSON	§
STATE OF LOUISIANA	§
PARISHES OF ST. BERNARD &	§
ORLEANS	§

This Assignment and Bill of Sale ("Assignment") is effective as to each Property as of the Effective Time stated below ("Effective Time"), and is from CAPCO OFFSHORE, INC., a Texas Corporation with an address of 5555 San Felipe, Suite 750, Houston, Texas 77056 (“Seller”) to HOACTZIN PARTNERS, L.P., a Delaware limited partnership with an address of 87 South Saxon Avenue, Bay Shore, New York 11706 (“Buyer”).

I.

For ten dollars and other good and valuable consideration, the receipt and sufficiency of which Seller acknowledges, Seller bargains, sells, assigns, and conveys to Buyer and its successors and assigns, all of Seller's right, title, and interest in and to the following real and personal properties (collectively, "Properties"), subject to the terms of this Assignment, including its exhibits, and all applicable instruments of record in the county or parish where the Properties are located:

1. The oil and gas leasehold estates and other interests, insofar but only insofar as set out on Exhibit A (collectively, "Interests").

2. All contracts affecting the Interests, to the extent each is assignable, including agreements for the sale or purchase of oil, gas, and other hydrocarbons; processing agreements; division orders; unit agreements; operating agreements; and other contracts and agreements arising out of, connected with, or attributable to production from the Interests, including the items listed on Exhibit A.

3. All personal property, including material, equipment, and facilities situated in and on the Properties and used solely in connection with the use or operation of the Interests for the production, treating, storing, transporting, and marketing of oil, gas, and other hydrocarbons from the Interests.

4. All easements, permits, licenses, surface and subsurface leases, rights-of-way, servitudes, and other surface and subsurface rights affecting the Interests, to the extent each is assignable, including the items listed on Exhibit A.

5. Copies of the data and records relating to the Properties and Interests that have been or will be delivered by Seller to Buyer ("Documents").

Exclusions. The following are excluded from this Assignment:

A. Pipelines, fixtures, equipment, and interests in land owned by third parties.

B. Personal property, fixtures, equipment, pipelines, facilities and buildings located on the land associated with the Interests, but either currently in use in connection with the ownership or operation of other property owned by third parties and not included in the Interests or excluded on Exhibit A.

C. Claims, rights, and causes of action of any kind concerning the Properties against royalty owners, overriding-royalty owners, working-interest owners, gas purchasers, gas transporters, and other third parties that accrued before the Effective Time, whether discovered before or after the Effective Time.

Documents. If originals or the last-remaining copies of the Documents have been provided to Buyer, Seller may have access to them at reasonable times and upon reasonable notice during regular business hours for as long as any Interest is in effect after the Effective Time (or for twenty-one years in the case of a mineral fee or other non-leasehold interest or a longer period if required by law or governmental regulation). Seller may, during this period and at its expense, make copies of the Documents pursuant to a reasonable request. Without limiting the generality of the two preceding sentences, for a period as long as any Interest is in effect after the Effective Time (or for twenty-one years in the case of a mineral fee or other non-leasehold interest or for a longer period if required by law or governmental regulation), Buyer may not destroy or give up possession of any original or last-remaining copy of the Documents without first offering Seller the opportunity, at Seller's expense, to obtain the original or a copy. After this period expires, Buyer must offer to deliver the Documents (or copies) to Seller, at Seller's expense, before giving up possession or destroying them.

II.

Ad valorem taxes assessed against the Properties for the year of the Effective Time are apportioned between Seller and Buyer as of the Effective Time.

Buyer will comply with all rules, regulations, statutes, and laws applicable to Buyer's ownership or operation of the Properties.

III.

Except to the extent specifically excepted or reserved by Seller, Buyer accepts this Assignment and assumes all Seller's obligations and liabilities under all oil, gas, and mineral leases, assignments, subleases, farmout agreements, unit agreements, joint operating agreements, pooling agreements, letter agreements, easements, rights-of-way, gathering and transportation agreements, sales agreements, and other agreements (including compliance with express and implied covenants and payment of costs, rentals, shut-in-payments, minimum royalties, and production royalties), to the extent that these obligations and liabilities concern or pertain to the Properties and are binding on Seller or its successors or assigns. Buyer's obligations under this article apply to all applicable instruments, whether recorded or not.

IV.

Buyer and Seller acknowledge that the Interests and Properties 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 Properties or associated with the Interests. Equipment and sites included in the Interests or Properties may contain asbestos, hazardous substances, or naturally occurring radioactive material ("NORM"). NORM may affix or attach itself to the inside of wells, materials, and equipment as scale, or in other forms; the wells, materials, and equipment located on the Properties or included in the Interests may contain NORM and other wastes or hazardous substances; and NORM-containing material and other wastes or hazardous substances may have been buried, come in contact with the soil, or otherwise been disposed of on the Properties. Special procedures may be required for the remediation, removal, transportation, or disposal of wastes, asbestos, hazardous substances, and NORM from the Interests and Properties.

V.

Seller recognizes, and will either perform or assure that performance is accomplished properly and in accordance with applicable law and the obligations and liabilities described in Article III, all obligations to abandon, restore, and remediate the Properties and the Interests, whether arising before or after the Effective Time, including obligations, as applicable, to:

(a) obtain plugging exceptions in the operator's name for each well located on the Properties (abandoned and unabandoned) with a current plugging exception or permanently plug and abandon each well.

(b) plug, abandon, and if necessary, reabandon each well located on the Properties (abandoned and unabandoned).

(c) remove all equipment and facilities, including flowlines, pipelines and platforms.

(d) close all pits.

(e) restore the surface, subsurface, and offshore sites associated with the Interests and Properties.

Buyer and Seller will take all necessary steps to ensure that Buyer is recognized as the owner and, if applicable, that Seller is the operator of the Properties by all appropriate parties, including any regulatory commission, body or board with jurisdiction. If Seller is the principal on any financial assurance (including a bond) relating to the Properties, which financial assurance is required by any law, rule, or regulation, then Seller will maintain financial assurance in the required amount and supply it to the regulatory body requiring the financial assurance, to the end that Buyer’s financial assurance obligations are fulfilled.

Seller will pay all costs and expenses associated with the obligations assumed under this article.

VI.

The terms Claim or Claims mean, collectively, claims, demands, causes of action, and lawsuits asserted or filed by any person, including an artificial or natural person, a local, state, or federal governmental entity; a person holding rights under any instrument described in Article III; an Associated Party of Seller or Buyer; or a third party. The term Liability or Liabilities means, collectively, all damages (including consequential and punitive damages), including those for personal injury, death, or damage to personal or real property (both surface and subsurface) and costs for remediation, restoration, or clean up of contamination, whether the injury, death, or damage occurred or occurs on or off the Properties by migration, disposal, or otherwise; losses; fines; penalties; expenses; costs to remove or modify facilities on or under the Properties; plugging liabilities for all wells; attorneys' fees;courtand other costs incurred in defending a Claim; liens; and judgments; in each instance, whether these damages and other costs are known or unknown, foreseeable or unforeseeable on the Effective Time. The term Associated Parties means successors, assigns, directors, officers, employees, agents, contractors, subcontractors, and affiliates.

Seller releases and discharges Buyer and its Associated Parties from each Claim and Liability relating to the Properties, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S RELEASE AND DISCHARGE OF BUYER AND ITS ASSOCIATED PARTIES INCLUDE CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYERORITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT, OR SOLE. The only exception to Seller's release and discharge of Buyer and its Associated Parties is stated in 16.04(e) of the Purchase and Sale Agreement (as hereinafter defined), and the release and discharge are binding on Seller and its successors and assigns other than Buyer.

Seller covenants not to sue Buyer or its Associated Parties with regard to any Claim or Liability relating to the Properties, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S COVENANT NOT TO SUE BUYER OR ITS ASSOCIATED PARTIES INCLUDES CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE. The only exception to Seller's covenant not to sue Buyer or its Associated Parties is stated in Section 16.04(e) of the Purchase and Sale Agreement, and the covenant is binding on Seller and its successors and assigns other than Buyer.

Seller will indemnify, defend, and hold Buyer and its Associated Parties harmless from each Claim and Liability relating to the Interests, Property, or this transaction, regardless of when or how the Claim or Liability arose or arises or whether the Claim or Liability is foreseeable or unforeseeable. SELLER'S OBLIGATIONS TO INDEMNIFY, DEFEND, AND HOLD BUYER AND ITS ASSOCIATED PARTIES HARMLESS INCLUDE CLAIMS AND LIABILITIES RESULTING IN ANY WAY FROM THE NEGLIGENCE OR STRICT LIABILITY OF BUYER OR ITS ASSOCIATED PARTIES, WHETHER THE NEGLIGENCE OR STRICT LIABILITY IS ACTIVE, PASSIVE, JOINT, CONCURRENT OR SOLE.The only exception to Seller’s obligations to indemnify, defend, and hold Buyer and its Associated Parties harmless is stated in Section 16.04(e) of the Purchase and Sale Agreement, and the obligations are binding on Seller and its successors and assigns other than Buyer.

Seller’s duty to release, discharge, not to sue, indemnify, defend, and hold Buyer and its Associated Parties harmless includes Claims or Liabilities arising in any manner from the physical or environmental condition of the Interests and Properties, including Claims or Liabilities under applicable laws and regulations now enacted or that may be enacted in the future, including the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time.

VII.

Buyer represents that it has acquired the Properties for its own benefit and account and has not acquired the Properties with the intent of distributing fractional undivided interests in them or otherwise selling them in a manner that would be subject to regulation by federal or state securities laws. If Buyer sells, transfers, or otherwise disposes of the Properties or fractional undivided interests in them in the future, it will do so in compliance with applicable federal and state laws.

VIII.

This Assignment is subject to the terms of that certain Purchase and Sale Agreement dated May 4, 2005 (the “Purchase and Sale Agreement”). The Purchase and Sale Agreement provides, in part, that the parties will correct errors that may have been made in the conveyancing instruments; that Seller may require that all or a part of the Properties be reassigned under certain circumstances; and that disputes concerning the Properties or the transaction will be resolved by alternate dispute resolution, to the extent, if any, that Seller has not released, discharged, or covenanted not to sue Buyer or its Associated Parties. The Management Agreement provides that Seller will manage the Interests in the place and stead of Buyer and for reacquisition of the Properties by Seller, among other things.

The provisions of this Assignment are severable. If a court of competent jurisdiction finds any part of this Assignment to be void, invalid, or otherwise unenforceable (except for the release, waiver, defense, and indemnity provisions), this holding will not affect other portions that can be given effect without the invalid or void portion.

All covenants and agreements in this Assignment (except Article VIII) bind and inure to the benefit of the heirs, successors, and assigns of Seller and Buyer; are covenants running with the land; and are effective as stated, whether or not the covenants and agreements are memorialized in assignments and other conveyances executed and delivered by the parties and their respective heirs, successors, and assigns from time to time.

Recitation of or reference to any agreement or other instrument in this Assignment, including its exhibits, does not operate to ratify, confirm, revise, or reinstate the agreement or instrument if it has previously lapsed or expired.

This Assignment and its performance will be construed in accordance with, and governed by, the internal laws of the State of Texas, without regard to the choice of law rules of any jurisdiction, including Texas.

The word includes and its syntactical variants mean "includes, but not limited to" and its corresponding syntactical variants. The rule of ejusdem generis may not be invoked to restrict or limit the scope of the general term or phrase followed or preceded by an enumeration of particular examples.

All exhibits referenced in and attached to this Assignment are incorporated into it.

This instrument may be executed in counterparts, all of which together will be considered one instrument.

As to each Property, the Effective Time shall be as follows:

High Island Interests:	November 1, 2004
Brazos Interests:	January 1, 2005
Galveston Interests:	January 1, 2005
Chandeleuer Interests:	January 1, 2005

All as of 7:00 a.m. local time on the respective dates.

Executed on the dates indicated below, but effective as of the Effective Time.

CAPCO OFFSHORE, INC.	HOACTZIN PARTNERS, L.P.
By:	By:	Dolphin Advisors, LLC
Mike Myers, President		Its General Partner
	By:	Dolphin Management, Inc.
Date:		Its Managing Member
	By:
		Peter Salas, President
	Date:

WITNESSES:	WITNESSES:
______________________________	______________________________
______________________________	______________________________

[Acknowledgments]

STATE OF TEXAS	§
COUNTY OF ___________	§

This instrument was acknowledged before me on this day of May, 2005, by Mike Myers, President of Capco Offshore, Inc., a Texas corporation, on behalf of said corporation.

Notary Public, State of Texas

STATE OF TEXAS	§
COUNTY OF _____________	§

This instrument was acknowledged before me on this day of May, 2005, by Peter Salas, President of Dolphin Management, Inc. a _______________________ corporation and managing member of Dolphin Advisors, LLC, a _________________ limited liability company and general partner of Hoactzin Partners, L.P., a Delaware limited partnership, on behalf of said limited partnership.

Notary Public, State of Texas

EXHIBIT C

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO ENERGY, INC. AND CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

FORM OF

MANAGEMENT AGREEMENT

EXHIBIT D

Attached to and made a part of the

PURCHASE AND SALE AGREEMENT

Between

CAPCO ENERGY, INC. AND CAPCO OFFSHORE, INC.

As Seller

And

HOACTZIN PARTNERS, LP

As Buyer

GAS-PRODUCTION-IMBALANCE ACCOUNTS

MANAGEMENT AGREEMENT

THIS MANAGEMENT AGREEMENT (“Agreement”) is made and entered into as of May 4, 2005, by and between Hoactzin Partners, LP and/or Assigns (“Owner”) Capco Energy, Inc. and Capco Offshore, Inc. (together, “Manager”).

WITNESSETH:

WHEREAS, Owner holds certain oil and gas interests pursuant to the terms of that certain Purchase and Sale Agreement between Owner and Manager (the “Purchase and Sale Agreement”), of even date herewith, and pursuant to assignments made thereunder;

WHEREAS, Owner desires to engage Manager to manage the oil and gas interests owned by it;

WHEREAS, Manager desires to manage such oil and gas interests of Owner; and

WHEREAS, terms not otherwise defined herein shall have the meanings assigned to those terms in the Purchase and Sale Agreement.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Manager Representations and Warranties. Manager represents and warrants to Owner that:

(a)Manager has full corporate power and authority to own its assets and to carry on its business as it is now being conducted and to execute and deliver this Agreement and each of the Additional Instruments and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby.

(b)The execution, delivery and performance by Manager of this Agreement and the Additional Instruments to which Manager is a party and the consummation by Manager of the transactions contemplated hereby and thereby have been duly authorized by all requisite action of Manager.

(c)This Agreement and the Additional Instruments to which Manager is a party have been duly and validly executed and delivered by Seller and constitute the legal, valid and binding obligations of Manager, enforceable against it in accordance with their respective terms.

(d)The execution and delivery by Manager of this Agreement and each of the Additional Instruments to which it is a party, the performance by Manager of its obligations hereunder and thereunder and the consummation by Manager of the transactions contemplated hereby and thereby do not:

(i)violate any provision of the certificate of incorporation or bylaws (or comparable organizational documents) of Manager;

(ii)result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any oral or written agreement, instrument, contract, undertaking, mortgage, indenture, lease, license or other understanding to which Manager is a party or by which any of the properties or assets of Manager may be bound or otherwise subject; or

(iii)contravene or violate any law, rule, regulation, or order applicable to Manager, Manager’s Associated Parties, or any of their respective properties or assets.

(e)Manager is experienced in the operation of offshore oil and gas properties and has the requisite personnel resources, training and experience to manage and operate the Interests (as such term is hereinafter defined).

2.The Interests. Owner represents and acknowledges that it holds certain oil and gas leasehold interests, appurtenant rights, and other economic interests in the oil and gas leases and wells (the “Interests”) set forth in Exhibit A hereto.

3.Appointment of Manager. Manager is hereby designated as the manager of the Interests, and, in such capacity, shall be the general manager of and shall conduct, direct and have full control of all matters pertaining to the Interests as permitted and required by this Agreement, subjectto the rights of Owner as owner. Manager shall be the sole manager of the Interests, and the enumeration of the particular or specific powers in this Agreement shall not be considered as in any way limiting or abridging the general power or discretion intended to be conferred on or reserved to the Manager to authorize it to do any and all things proper, necessary or expedient, in its discretion, to carry out the purposes of this Agreement.

4.Operating Agreement. The parties agree to enter into one (1) operating agreement for the operation of the Interests which shall be substantially in the form of the operating agreement attached hereto as Exhibit B (the “Operating Agreement”). All Interests shall be operated under one Operating Agreement. Manager will cause the Interests to be managed pursuant to the terms of the Operating Agreement. In the event of any conflict between the terms of the Operating Agreement and this Agreement, the terms of this Agreement will control.

5.Duties of Manager. Manager shall devote sufficient time to the duties and responsibilities required for the prudent management of the Interests; and will at all times, faithfully, industriously, and to the best of its ability, experience and talents, perform all such duties and responsibilities in a good and workmanlike manner. Management duties shall include, without limitation, the following services:

(a)Performing accounting and billing functions; receiving, distributing and reporting income on at least a quarterly basis.

(b)Performing the duties and obligations of Owner under the Operating Agreement.

(c)Preparing and/or responding to authorizations for expenditure (“AFEs”) relating to the Interests, and preparing, reviewing and responding to correspondence relating to the Interests; provided, however, that Manager shall not approve AFEs on behalf of Owner in amounts greater than $50,000 to the interest of Owner.

(d)Approving expenditures relating to the Interests, for the interest of Owner, up to the gross amount of $50,000 for any one-month period. Manager agrees that it will not approve or incur expenditures in amounts in excess of the aforesaid amount without the prior written approval of Owner; provided, in case of explosion, fire, flood, blowout or other sudden emergency, Manager may take such reasonable steps and incur such reasonable expenses as in its opinion are required to deal with the emergency to safeguard life and property and to comply with law and regulation, and shall report the emergency to Owner as promptly as possible. Owner agrees to respond to Manager’s proposal for expenditures in accordance with the time requirements of the Operating Agreement and any operating agreement under which Manager is not operator and that Manager shall have no liability for damages or losses resulting from Owner’s failure to respond timely so long as Manager has timely provided such proposal to Owner.

(e)Overseeing and supervising on behalf of Owner the overall operation of the Interests.

(f) Submitting to Owner as promptly as is practicable, but not more than thirty (30) days after the end of each calendar quarter, a statement setting out the revenues, costs and expenses incurred during such month for the Interests, along with payment of Net Operating Cash Flow (as such term is hereinafter defined) attributable to the Interests.

(g)Marketing production from the Interests upon terms no less attractive than Manager obtains for any of its owned production from the Interests; provided that, at no time shall production from the Interests be sold to an affiliate of Manager or Owner, and Manager shall not be permitted to enter into any advance payment contracts or contracts providing directly or indirectly for the pre-sale of production from the Interests (collectively, “Advance Payment Contracts”) other than in the nomination and sale of natural gas for the month next following, without the prior written consent of Owner, which consent shall not be unreasonably withheld if such Advance Payment Contract will not have an adverse tax or economic impact upon Owner.

(h)Manager shall complete and submit on behalf of Owner such incidental/and periodic reports and/or submissions as may be required by law, by regulation, or by order of local, state, and federal regulatory agencies or bodies with jurisdiction (a) over the Interests, (b) the use, ownership, operation or maintenance of the Interests, (c) Owner as owner of and Manager as manager of the Interests, or (d) production from the Interests.

(i)In the case of Interests operated by third parties as of the Effective Time, Manager shall represent the interests of Owner pursuant to the terms of the operating agreement in effect as to said Interests and in conformance with the covenants hereof.

6.Management of the Interests; Payment of Costs.

(a)At all times prior to the Termination Date (as such term is hereinafter defined), Manager shall:

(i)Cause the Interests to be maintained and operated for the production of hydrocarbons in a good and workmanlike manner, as would a prudent operator (and without regard to the existence of the Purchase Option, as such term is hereinafter defined), all in accordance with generally accepted standards and all applicable federal, state and local laws, rules and regulations.

(ii)Cause the Interests to be developed, operated and maintained in compliance with all applicable laws, rules and regulations and in compliance with the Related Agreements governing the same.

(iii)Pay or cause to be paid on behalf of Owner, promptly as and when due and payable, all rentals and royalties payable with respect to the production of hydrocarbons from the Interests (“Lease Burdens”) and all Costs (as such term is hereinafter defined) incurred in or arising from the operation or development of the Interests or the production, treating, gathering, marketing or transporting of hydrocarbons from the Interests.

(iv)Pay or cause to be paid all capital costs which are agreed to in writing by Owner and Manager and are actually expended in the development and operation of the Interests and all other Costs required for the prudent and reasonable maintenance and operation of the Interests in accordance with generally accepted oil and gas industry standards.

(b)The term “Costs” shall mean, on a cash accounting basis, the sum of :

(i)The following costs actually paid by or on behalf of Owner during any calendar month insofar as they are attributable to the Interests, and whether capital or non-capital in nature:

(A)All costs, expenses and liabilities, including capital and non-capital costs, paid by or on behalf of Owner pursuant to applicable Operating Agreement covering the Interests or otherwise for and in connection with the ownership, operation or maintenance of the Interests (excluding any overhead of Manager) and the lifting, handling, gathering, producing, treating, storing, marketing, and transporting of production from the Interests and the disposal of produced water therefrom; and

(B)All federal, state and local taxes (except mortgage and income taxes) paid by or for the account of the Interests, including without limitation production, occupation, excise, severance, ad valorem or other production related taxes, and any other taxes (except taxes on income) imposed on oil or natural gas, attributable to the Interests or the ownership or sale of production therefrom;

(C)Capital costs shall be a part of Costs only if approved in accordance with Section 5(d) hereof; and

(ii)Excess Costs for the preceding month (including the Excess Costs carried forward from any preceding month subsequent to the Effective Time).

(d)The term “Excess Costs” shall mean, for each calendar month, the excess, if any, of Costs (exclusive of capital costs) over revenue attributable to the sale of production from the Interests and actually received during any calendar month by or on behalf of Owner net of any Lease Burdens on production which are borne by the Interests and were created prior to the Effective Time for the respective Interests.

7.Compensation. Compensation to Manager under the Operating Agreement and under this Agreement shall be as follows:

(a)As sole consideration for the services to be rendered by Manager under the Operating Agreement, Owner shall pay Manager $2,500.00 per calendar month plus $500.00 per month for each well over six (6) wells with respect to which Manager serves as the operator under the Operating Agreement, which sum shall cover all non-third party costs of operations.

(b)As sole consideration for the services to be rendered by the Manager under this Agreement, and commencing with the first (if any) full fiscal quarter of Owner at the beginning of which (i) the Aggregate Investment Amount (as defined below) equals zero ($0.00) and (ii) Owner does not reasonably believe that it will require additional funding in order to meet its obligations under Section 8 of this Agreement or any other legal obligations relating to the Interests, the Manager shall accrue a quarterly fee (the “Management Fee”) equal to the excess of (X) 66.7% of the Net Operating Cash Flow attributable to Owner from the Interests, computed without taking into consideration the fees payable under this Section 7, with respect to each full fiscal quarter of Owner over (Y) all amounts owing to Owner under the Purchase and Sale Agreement and all operating and administrative expenses of Owner relating directly to the Interests (in each case to the extent not already deducted from a prior payment of the Management Fee or otherwise reimbursed or paid by the Manager). The Management Fee shall be payable with respect to each quarter within 45 days after the end thereof. The term “Net Operating Cash Flow” shall mean, for any period, the positive difference remaining after deduction of all (i) Costs attributable to production from the Subject Interests from (ii) revenues attributable to the Interests, all for such period.

“Aggregate Investment Amount” means, at any time of calculation, the sum of (i) $18,457,175.88, plus (ii) Manager’s and Owner’s legal and other expenses related to closing the Purchase and Sale Agreement and which are funded by Owner, plus (iii) the aggregate amount contributed through such time in accordance with Section 9 of this Agreement, together with interest on such amounts accruing on a daily basis (in the case of (i) and (ii), from the date such amounts were initially made available to Manager or to third parties through lending arrangements or otherwise, and in the case of (iii), from the date of each contribution as applicable) at an annualized rate of 8%, less all Net Operating Cash Flow received by Owner through such time.

8.Purchase and Sale Options. Manager shall have the right and option to acquire all, but not less than all, the Interests from Owner (the "Purchase Option"), and Owner shall have the right and option to sell all, but not less than all, the Interests to Manager (the “Sale Option”), according to the following terms and conditions:

(a) The term “Repayment Date” shall mean that date upon which the Aggregate Investment Amount equals zero ($0.00). Owner shall provide to Manager written notice of the achievement of the Repayment Date not less than 30 days after the Repayment Date occurs.

(b) Manager shall be entitled to exercise the Purchase Option at any time after the one-year anniversary of the Repayment Date.

(c) Owner shall be entitled to exercise the Sale Option at any time after the two-year anniversary of the Repayment Date.

(d) To be entitled to exercise its respective option, the party wishing to exercise its option shall give written notice to the other party of its intent to exercise its option (the “Option Notice”), said Option Notice to be delivered not less than sixty days prior to the desired date of transfer of the Interests to Manager (the “Option Closing Date”). The Option Notice shall (i) set forth the estimated Option Closing Date; (ii) state the exercising party’s valuation of the price at which the Interests shall be acquired by Manager (the “Option Price”); (iii) set forth the exercising party’s calculation of the Option Price; and (iv) provide reasonable data in support of that calculation.

(e) The Option Price shall be calculated as follows:

(i)If the Purchase Option is exercised prior to the two-year anniversary of the Repayment Date, the Option Price shall be two times sum of (A) the Net Operating Cash Flow accruing to Owner during the twelve-calendar-month period immediately preceding the month in which the Option Notice is delivered, computed without taking into consideration the fees payable under Section 7(a) hereof, and (B) the amount of any Costs during such period that are capital costs.

(ii)If the Purchase Option is exercised at or after the two-year anniversary date of the Repayment Date, the Option Price shall be equal to the sum of (A) the Net Operating Cash Flow accruing to Owner during the twenty-four-calendar-month period immediately preceding the month in which the Option Notice is delivered, computed without taking into consideration the fees payable under Section 7(a) hereof, and (B) the amount of any Costs during such period that are capital costs.

(iii)If the Sale Option is exercised, the Option Price shall be equal to the sum of (A) the Net Operating Cash Flow accruing to Owner during the thirty-calendar-month period immediately preceding the month in which the Option Notice is delivered, computed without taking into consideration the fees payable under Section 7(a) hereof, and (B) the amount of any Costs during such period that are capital costs.

(f) Not less than 15 days following delivery of an Option Notice, the party receiving the Option Notice shall provide written acceptance of, or objection to, the Option Price set forth therein, and in the case of objection the writing shall (i) state the bases for objection, and (ii) provide the objector’s calculation of the Option Price which it believes should apply.

(g) If the non-exercising party disagrees with the exercising party’s Option Price, the parties shall negotiate in a good faith attempt to agree upon the Option Price. If no agreement is reached within 45 days after delivery of the Option Notice, the Option Price using the applicable valuation formula shall be determined in accordance with the terms of this Section 8 by an independent Certified Public Accountant with not less than ten years of oil and gas revenue accounting experience (the “Valuation Party”).

(h) The term “Valuation Date” shall mean the earlier to occur of (i) the non-exercising party’s acceptance of the exercising party’s Option Price in the Option Notice; (ii) the parties’ subsequent agreement upon the Option Price in the case of an objection, or (iii) determination of the Option Price by the Valuation Party.

(i)If the Sale Option is exercised, Manager shall have the option to make payment, in lieu of cash consideration, by issuing or causing to be issued to Owner registered shares of Capco Energy, Inc. common stock at an initial value of $0.20 per share. Such value shall be adjusted to reflect stock splits, stock dividends, recapitalizations, and the like, and shall be adjusted down to the lowest price per share at which Capco Energy, Inc. sells any shares of its common stock after the date hereof, including any securities convertible into common stock or conferring the right to purchase common stock.

(j) Upon a party’s exercise of its Option, the closing pursuant to the Option (the “Option Closing”) shall occur within 60 days of the Valuation Date. Each party agrees to execute and deliver any and all documents reasonably requested to effectuate the transfer of the Interests to Manager. Without limiting the generality of the foregoing, such transfer shall be effectuated on an “as-is, where-is” basis and without any post-transfer obligations of any kind on the part of Owner. Failure by a party to execute and deliver the required documentation will be deemed a breach, and the party not in breach will be authorized to seek injunctive relief and to pursue any and all legal remedies available to it.

(k) Insolvency. The Purchase Option shall terminate upon any insolvency of, or commencement of bankruptcy proceedings by or against, Manager.

(l) Tax Reporting. Each of the parties agrees, upon reasonable notice and during normal business hours, to provide the other party with access to the records in such party's possession or control as may be required to be examined or copied in connection with the accounting or reporting of this transaction to taxing authorities and in connection with responding to audits or inquiries by taxing authorities.

9.Additional Funding; Issuance of Warrants.

(a) If (i) the Manager and Owner mutually agree that Owner will fund additional working capital requirements of the Interests or (ii) Owner receives any claim, invoice or other notice from a third party alleging or otherwise indicating that Owner is required to make any payment or take any action in connection with the Interests, and Owner reasonably believes that it requires additional funding in order to make such payment, take such action or defend itself in connection with such claim, invoice or notice, Owner (A) in the case of clause (i) above, shall and (B) in the case of clause (ii) above, may contribute such funds (in debt, equity or any combination thereof at its sole discretion), to such extent, from time to time. As conditions precedent to Owner’s obligation to make any such contribution contemplated by clause (i) above, the Manager shall (X) issue or cause to be issued to Owner a warrant pursuant to Section 9(b) and (Y) have fully performed all obligations to be performed by it under the Purchase and Sale Agreement, the Operating Agreement, and any operating agreement in effect as to properties operated by third parties, except those obligations for which the time for performance has not then expired.

(b)In the event of any additional funding of Owner pursuant to Section 9(a), Manager shall issue or cause to be issued to Owner a warrant (in form and substance as set forth on Exhibit C hereto, “Warrant”) simultaneously with Owner’s funding of each such contribution, to purchase a number of shares of common stock of the Manager, par value $0.001 per share, equal to the Market Price (as defined in the Warrant) times 33.34% of the equity or principal amount of debt of such contribution, at an exercise price per share of $0.1952. Any contribution made by Owner prior to the issuance by Manager of such Warrant shall not be deemed a waiver of Manager’s obligation to issue such Warrant.

10.Exculpation. Neither Manager nor any parent, subsidiary, affiliate, officer or employee or any of them shall be liable to Owner for any losses sustained or liabilities incurred as a result of any act or omission of Manager or any agent or employee of it except as may result from bad faith, negligence, willful misconduct or breach of this Agreement by such an agent or employee. Manager shall never be liable to Owner as a fiduciary and in all its dealings shall perform its obligation hereunder as a reasonable prudent manager.

11.Accounting and Disbursements. Manager will maintain general accounting records relating the operation of the Interests in accordance with generally accepted accounting principles. Manager shall collect funds generated by the Interests; shall promptly pay and discharge all costs and expenses incurred in the operation of the Interests pursuant to this Agreement; and shall provide quarterly reports to owner relating to the Interests. All records maintained by Manager pursuant to the provisions of this Section 11 shall be made available for inspection and copying by Owner, upon request by Owner, at Manager’s offices during normal business hours.

12.Term. The term of this Agreement shall commence on May 4, 2005 and shall terminate on the Termination Date. The “Termination Date” shall be the earlier of (a) that date on which is effective reassignment of the Interests to Manager pursuant to either the Purchase Option or the Sale Option, and (b) any insolvency of, or commencement of bankruptcy proceedings by or against, Manager. In any event this Agreement shall automatically terminate upon the Termination Date. The termination of this Agreement shall not affect the rights or liabilities of either Manager or Owner under the Operating Agreement.

13.Remedies Upon Default. If, prior to the Termination Date, Manager shall fail to perform or observe any of the covenants, agreements or obligations herein provided to be performed or observed by Manager, Owner, in addition to Owner’s right to recover damages and all other remedies available to Owner hereunder or at law or in equity, may, if such failure shall continue unremedied after ten (10) days from delivery to Manager of written notice thereof (unless within such ten (10) days, Manager has begun to cure such noncompliance in a manner satisfactory to Owner and Manager continues to diligently pursue such curative actions until such failure is remedied to the satisfaction of Owner), perform or cause to be performed such act at Manager's expense, in which event Owner may expend funds for such purpose, and Owner, upon written notice to Manager, shall be entitled to receive all proceeds payable to Manager pursuant to this Agreement to reimburse Owner for any amounts so expended plus interest on any such amounts at the rate of eight percent (8%) per annum from the dates such amounts were advanced by Owner until the dates on which Owner recovers said amounts from Manager. Additionally, Owner shall be entitled to offset and reduce (i) any payments otherwise due and owing Manager under this Agreement, (ii) any amounts otherwise due and owing to Manager under the Bridge Note, and (iii) any amounts otherwise due and owing to Manager, under the provisions of this Agreement or the Purchase and Sale Agreement, to recover any amounts so advanced by Owner plus interest thereon at the rate herein above stated. To secure all of the obligations owed by Manager to Owner under the terms of this Agreement and the Purchase and Sale Agreement, Manager hereby grants, bargains, sells and assigns to Owner a first and prior lien and security interest (a) upon Manager's Purchase Option, and (b) upon the oil and gas production attributable to the Interests pursuant to this Agreement, the proceeds from the sale of oil or gas at the wellhead, and all accounts relating thereto. To perfect the lien and security interest provided herein, Manager agrees to execute and acknowledge a recording supplement and/or financing statement prepared and submitted by Owner in connection herewith or at any time following execution hereof. Further, Manager hereby authorizes Owner to file this Agreement or any recording supplement executed in connection herewith as Manager's agent and attorney in fact as a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform Commercial Code in the state in which the Interests are located in order to perfect the security interests granted herein. Upon material default by Manager with respect to any of its obligations hereunder and Manager's failure to remedy such default within sixty (60) days of receipt of notice thereof as hereinabove provided, or Manager’s failure to commence diligent efforts to cure such default within said sixty-day period and thereafter to proceed with diligence to cure, Owner shall have the right, without prejudice to other rights or remedies, to terminate this Agreement, take possession and control of the Interests (to the exclusion of Manager) and to collect from the purchaser(s) of production from the Interests proceeds otherwise payable to Manager until the amount owed by Manager to Owner plus interest at the rate hereinabove stated shall have been paid in full. Each purchaser shall be entitled to rely upon Manager's written statement concerning the amount of any default.

14.No Partnership. This Agreement is not intended to create, and shall not be construed to create, a relationship of partnership, mining partnership, joint venture or an association for profit between the parties hereto.

15.Force Majeure. If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this Agreement, other than the obligation to make money payments, that party shall give to the other party prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during the continuance of the force majeure. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The term “force majeure” shall mean act of God, strike, lockout or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kinds specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. Nothing herein shall require the settlement of labor difficulties by any party contrary to its wishes.

16.Independent Contractor. In all things hereunder, Manager shall be an independent contractor not subject to the control or direction of Owner except as to the type of operations to be undertaken in accordance with the terms of this Agreement. Manager shall not be deemed, or hold itself out as, the agent of Owner with authority to bind it to any obligation or liability assumed or incurred by Manager as to any third party.

17.Assignment and Binding Effect. This Agreement shall be binding upon the parties hereto, their successors and assigns, except that this Agreement shall not be assigned by Manager, without the express written consent of Owner, but this Agreement may be assigned in whole or in part by Owner.

18.Notices. Notices authorized or required hereunder shall be given by governmental mail, telegram or other telegraphic means, postage or charges prepaid, or confirmed telecopy, addressed to the party to whom the notice is given at its address set out in the Purchase and Sale Agreement. All notices are deemed given when received. Each party may change its address by giving written notice to the other.

19.Applicable Law. This Agreement shall be construed under and governed by the laws of the State of Texas, without regard, however, to the conflicts of laws provisions thereof.

20.Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall be in force when one or more counterparts have been signed by each of the parties.

21.Rule Against Perpetuities Savings. This Agreement shall be construed so as not to violate the Rule Against Perpetuities (“RAP”). If Sections 8(b) or 8(c) hereof should be determined to violate the RAP, the time for exercising the Option shall be deemed to be twenty-one (21) years, less one day, from the date hereof.

22.Additional Properties. From time to time Manager and Owner may by mutual consent agree to add properties to this Management Agreement. The addition of such properties to this Management Agreement shall be evidenced in writing executed by all the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Management Agreement as of the date first above written.

CAPCO OFFSHORE, INC.
By:
	Name:
	Title:

CAPCO ENERGY, INC.
By:
	Name: Ilyas Chaudhary
	Title: Chief Executive Officer

 

HOACTZIN PARTNERS, L.P.
By:	DOLPHIN ADVISORS, LLC
	Its General Partner
By:	DOLPHIN MANAGEMENT INC.
	Its Managing Member
By:
Name:	Peter Salas
Title	President
Date:

EXHIBIT “A”

To Management Agreement between

CAPCO OFFSHORE, INC. and HOACTZIN PARTNERS, L.P.

DESCRIPTION OF PROPERTIES

A. BRAZOS INTERESTS

30% OF 8/8THS WORKING INTEREST, AND A PROPORTIONATE NET REVENUE INTEREST, AS OF THE EFFECTIVE TIME, IN AND TO THE FOLLOWING LEASES, INSOFAR ONLY AS SAID LEASES COVER AND INCLUDE THE WELLBORES OF THE WELLS LISTED BELOW AND ONLY TO THE EXTENT THAT SUCH LEASS ARE NECESSARY TO PRODUCE OIL AND/OR GAS FROM THE WELLBORES OF SAID WELLS, TOGETHER WITH A LIKE INTEREST IN THE EASEMENTS DESCRIBED BELOW:

BRAZOS 440L/441L/406L/407L

State Lease 57646, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SE/4 of State Tract 441L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 581.

State Lease 57645, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NE/4 of State Tract 441L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 577.

State Lease 57644, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SW/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 573.

State Lease 57642, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NW/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 569.

State Lease 57641, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering NE/4 of State Tract 440L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 565.

State Lease 60732, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective April 4, 1967, and covering SE/4 of State Tract 406L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 453 at Page 245.

State Lease 57633, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SE/4 of State Tract 407L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 544.

State Lease 57634, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and Shell Oil Company, as Lessee, effective February 2, 1965, and covering SW/4 of State Tract 407L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 430 at Page 565.

INSOFAR AND ONLY INSOFAR as the above leases are included within the 440L Unit more fully described as the following:

5,850.00 acres of land out of Tracts 407L, 406L, 441L, and 440L as shown on the Texas Gulf Coast Map, Sheet 3, from the Sabine River to the Rio Grande River as subdivided for Mineral Development by the General Land Office, dated January 1967, and the 5,850.00 acres of land being more particularly described as follows:

1350 acres out of State Tract 407L, being all of the south half (S 1/2) of the southeast quarter (SE 1/4) of Tract 407L, all of the southeast one-quarter (SE 1/4) of the southwest one-quarter (SW 1/4) of Tract 407L, all of the south one-half (S 1/2) of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 407L, and all of the northeast one-quarter (NE 1/4) of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 407L.

90 acres out of State Tract 406L, and being all of the southeast one-quarter (SE/4) of the southeast one-quarter (SE/4) of the southeast one-quarter (SE/4) of State Tract 406L.

1620 acres out of State Tract 441L, and being all of the north one-half (N 1/2) of the southeast one-quarter (SE 1/4) of State Tract 441L, all of the south one-quarter (S 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all the northeast one-quarter (NE1/4) of southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all of the north one-half (N 1/2) of the southeast one-quarter (SE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, all of the south one-half (S 1/2) of the northeast one-quarter (NE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L, and all of the northeast one-quarter (NE 1/4) of the northeast one-quarter (NE1/4) of the northeast one-quarter (NE 1/4) of State Tract 441L.

2790.00 acres out of State Tract 440L, and being all of the north one-quarter (N 1/4) of State Tract 440L, all of the south one-half (S 1/2) of the northwest one-quarter (NW 1/4) of State Tract 440L, all the north one-half (N 1/2) of the southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the northwest one-quarter (NW 1/4) of the southeast one-quarter (SE 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the southwest one-quarter (SW 1/4) of the southwest one-quarter (SW 1/4) of the northeast one-quarter (NE 1/4) of State Tract 440L, all of the north one-half (N 1/2) of the northwest one-quarter (NW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 440L, and all of the southwest one-quarter (SW 1/4) of the northwest one-quarter (NW 1/4) of the southwest one-quarter (SW 1/4) of State Tract 440L.

The above described unit is limited to all gas sands encountered in the interval between 6,580 feet and 7,860 feet, as shown on the induction-electrical log run in the Shell Oil Company’s well No. 2 located in the northwest one-quarter (NW 1/4) of State Tract 440L.

WELLS

Well Name		Working Interest			Net Revenue Interest
Brazos 440L	I-1		30.00	%		24.69999	%
Brazos 440L	4012		30.00	%		24.69999	%

 

OPTION WELL

Brazos 440L A-1 30.00 % 24.69999 %

State Easement ME 85-234, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 3 ½ inch pipeline.

State Easement ME 85-233, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 4 ½ inch pipeline.

State Easement ME 85-169, granted by the State of Texas, General Land Office, unto Conquest Exploration Company to construct a 12.75” pipeline.

BRAZOS 478L/479L

State Lease 96177, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and American Exploration Company, as Lessee, effective October 4, 1994, and covering north of the three marine league line within State Tract 478L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 950452 at Page 400941.

State Lease 97270, Oil and Gas Lease between the State of Texas, General Land Office, as Lessor, and American Exploration Company, as Lessee, effective April 2, 1996, and covering S/2 of NE/4 of State Tract 479L, Gulf of Mexico, Matagorda County, Texas recorded in Volume 963560 at Page 442494.

WELLS

Name	Working Interest			Net Revenue Interest
Brazos 478L #2		30.00	%		22.950	%

State Easement ME 970029, granted by the State of Texas, General Land Office, unto American Exploration Company for a 30’ wide easement.

State Easement ME 970031,granted by the State of Texas, General Land Office, for the 478L #2 well.

B. HIGH ISLAND INTERESTS

Seller Lease No.:	0408360-001 - OCS-G 06168
Lessor:	The United States of America
Lessee:	Exxon Corporation
Effective Date:	October 1, 1983
Lands Covered:	All of Block 196, High Island Area, OCS Leasing Map, Texas Map No. 7, LESS AND EXCEPT in the N/2, SW/4, and W/2SE/4 the Operating Rights in all depths below the base of the stratigraphic equivalent of the MM5 sand found at 12,430' MD and 9,484 TVD in the OCS-G 06168, No. B-2 Well, (API 427084034900), and LESS AND EXCEPT in the E/2SE/4 the Operating Rights as to all depths.
Interest:	Record Title Interest 100.00%,
	Net Revenue Interest BPO 78.33333%; APO 83.33333%
	The Before Payout (“BPO”) net revenue interest shown above reflects a 5.0% of 8/8ths overriding royalty retained by ExxonMobil as to which payout occurs once an aggregate $1,500,000 has been paid; thus, the After Payout (“APO”) net revenue interest is stated. This Interest also is subject to the Retained Revenue Interest, in favor of ExxonMobil, provided for by Section 3.04(b) of the ExxonMobil Agreement.

PIPELINE RIGHT-OF-WAY
	Right-of-way No.:	1027360 - OCS-G 21466
	Grantor:	The United States of America
	Grantee:	Exxon Mobil Corporation
	Effective Date:	February 22, 2001
	Right-of-way Description:	OCS-G 21466, Segment No. 12379 Pipeline Right-of-way for 10-3/4 inch pipeline from HI 176 "B" Platform to a side tap SSTI on Williams Field Services - Offshore Gathering Company's Existing 12 inch Pipeline (OCS-G 12370 - Segment 13143, formerly 9208) in Block 177.
	Interest:	100.00%
RIGHT-OF-USE AND EASEMENT PLATFORM "B" HIGH ISLAND BLOCK 176
	Right-of-use and easement No.:	Formerly 1029764 - OCS-G 23586 - to be determined after Closing
	Grantor:	The United States of America
	Grantee:	Formerly Exxon Mobil Corporation - to be Capco Offshore after Closing
	Effective Date:	Formerly March 10, 2003 - to be determined after Closing
	Right-of-use and easement description:	OCS-G 23586 - Right-of-use and easement to maintain Platform B in High Island, Block 176, expired lease, for the purposes of producing Wells B-1, B-2, B-3, and B-2d (sidetrack), High Island, Block 196, OCS-G 06168.
2.	Interest:	100%

SUBJECT TO THE FOLLOWING CONTRACTS
1.	Contract No.:	1001917 - Operating Agreement
	Parties:	Hall-Houston Oil Company and Exxon Corporation
	Effective Date:	September 1, 1988
	Lands Covered:	Covering High Island Block 176, Offshore Texas.
2.	Contract No.:	1001939 - Farmout Agreement
	Parties:	Hall-Houston Oil Company and Exxon Corporation
	Effective Date:	September 1, 1988
	Lands Covered:	Covering High Island Block 195, Offshore Texas.
3.	Contract No.:	0408358-001 - Platform and Facilities Agreement
	Parties:	Hall-Houston, Exxon Corporation et al
	Effective Date:	September 1, 1988
	Lands Covered:	Platform "A" (Platform ID No. 10468-1) located on High Island Block 176, including but not limited to the compressors, the facilities and the 10" sales line from Platform "A", High Island Block 176 to the subsea tap valve located in High Island Block 140 on Transco's 24" pipeline.

4.	Contract No.:	1029891 - Farmout Agreement
	Parties:	Exxon Mobil Corporation and Spinnaker Exploration Oil Company
	Effective Date:	May 30, 2003
	Lands Covered:	SE/4SE/4 High Island Block 196, OCS-G 06168
5.	Contract No.:	210466000 - Lateral Line Interconnect, Platform Use and Operation Agreement
	Parties:	WFS - Offshore Gathering Company, Seller Production Company and Apache Corporation
	Effective Date:	March 1, 2001
	Lands Covered:	The HI 176 B & C Gas Gathering System, being the pipeline from the base of the HI 176 B and HI 176 C risers to the WFS underwater tie-in assembly located in HI 177.
6.	Contract No.:	210466000-1 - Letter Agreement - Construction and Operation of Gathering Pipeline, High Island Block 176 and 177
	Parties:	Seller Production Company, Apache Corporation, Forcenergy Inc. and Ridgewood Energy Corporation
	Effective Date:	October 10, 2000
	Lands Covered:	The HI 176 B & C Gas Gathering System, being the pipeline from the base of the HI 176 B and HI 176 C risers to the WFS underwater tie-in assembly located in HI 177.
SUBJECT TO THE FOLLOWING PIPELINE RIGHTS-OF-WAY
1.	Pipelines:	0404358-002
		Pipeline Right-of-Way OCS-G 10515, Segment No. 8569
		0408360-002
		Pipeline Right-of-Way OCS-G 11186, Segment No. 8943
		0408360-003
		Pipeline Right-of-Way OCS-G 11156, Segment No. 8705
		0408360-004
		Pipeline Segment No. 11303

C. GALVESTON INTERESTS

LEASES

A.	Serial No.:	OCS-G 21324
	Date:	December 1, 1999
	Lessee:	Union Oil of California
	Land Covered:	Galveston Area Block 297, OCS Leasing Map, Texas Map No. 6, containing approximately 5760 acres.
D.	Serial No.:	OGS-G 25534
	Date:	November 1, 2003
	Lessee:	Fidelity Exploration & Production Company, et al.
	Land Covered:	Galveston Area Block 287, OCS Leasing Map, Texas Map No. 6, containing approximately 5760 acres.

E.	Serial No.:	OCS-G 25536
	Date:	October 1, 2003
	Lessee:	Gryphon Exploration Company
	Land Covered:	Insofar only as to the E/2 NE/4 Galveston Area Block 298, OCS Leasing Map, Texas Map No. 6,
		containing approximately 720 acres.

*Prospect Payout is defined in that certain Offshore Prospect Participation Agreement dated August 18, 1999, as amended December 30, 2004, between Capco Offshore, Inc., and Fidelity Exploration, et al.

WELLS

Name	Working Interest	Net Revenue Interest
GA 297 #1	30.00% WI - BPO	30% x 5/6 NRI - BPO*
	25.50% WI - APO	25.5% x 5/6 NRI - APO*

*Subject to and bearing its proportionate part of all existing overriding royalties, carried interests, and other burdens on production reflected of record or disclosed in that certain Offshore Prospect Participation Agreement dated December 30, 2004, Between Capco Offshore, Inc. and Fidelity Exploration Company, Inc., et al.

SUBJECT TO THE FOLLOWING PRIOR AGREEMENT

That certain Offshore Prospect Participation Agreement dated August 18, 1999, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company, as amended Dec. 30, 2004, covering all of Galveston Area Blocks 287, 297, and the E/2NE of Galveston Area Block 298.

SUBJECT TO THE FOLLOWING BURDENS

1. Overriding Royalty Interest in favor of Gryphon Exploration Company as set forth in that certain Letter Agreement dated October 1, 2004, by and between Fidelity Exploration & Production Company and Gryphon Exploration Company equal to 3.0% of 6/6^th covering the NW/4 of Galveston Area Block 297 and the E/2NE of Galveston Area Block 298.

2. After Prospect Payout Overriding Royalty Interest in favor of Blue Dolphin Petroleum Company as set forth in that certain Offshore Prospect Participation Agreement dated December 30, 2004, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company equal to 2.0% of 6/6^th covering all of Galveston Area Block 287, and 2.5% of 6/6ths covering all of Galveston Area Block 297.

3. After Prospect Payout Reversionary Interest in favor of Fidelity Exploration & Production Company and Blue Dolphin Petroleum Company as set forth in that certain Offshore Prospect Participation Agreement dated December 30, 2004, by and between Capco Offshore, Inc., Fidelity Exploration & Production Company, Reef Partners, L.L.C., and Blue Dolphin Exploration Company equal to 7.50% of 6/6^th each, covering all of Galveston Area Blocks 287, 297 and E/2NE of Galveston Area Block 298.

D. CHANDELEUR INTERESTS

Schedule of Wells

Well Name	API	Operator	Working Interest	Net Revenue Interest
CA Blk. 30 #1 (Hustler)	1772840058	Capco	1.000	0.79833333
CA Blk. 30 #3 (Seamaster)	1772840060	Capco	1.000	0.79833333
CA Blk. 27 #2 (Fireball)	1772840062	Capco	1.000	0.77892924
Biloxi Marsh LC #1-2	1708720315	MERIDIAN	0.145357	0.106111
PXP SL 17656 #2 (Fiesta)	1708720327	PXP	0.4375	0.328125
PXP CA 30 #2 (Hustler West)	1772840059	PXP	0.4375	0.3764583
PXP SL 17812 #1 (Avenger)	1773020034	PXP	0.4375	0.328125
PXP SL 17389 #1 (Prowler)	1773020036	PXP	0.4375	0.338125
PXP SL 17388#1(Catalina)	1773020035	PXP	0.4375	0.338125
PXP SL 17387#1 (Skyraider Dp.)	1773020038	PXP	0.4375	0.338125
PXP SL 17390#1(Twin Otter)	1772720532	PXP	0.4375	0.338125

Schedule of Leases

LEASES

LESSOR	LESSEE	DATE	RECORDING INFO.
USA-Mineral Management Service- OCS-G 24002***	Manti Resources, Inc.	5/1/2002	N/A
State of Louisiana - No. 17365	Kalar Corporation	3/18/2002	COB 717, Folio 339/MLB 116,Folio 6, Entry 397916, St. Bernard Parish, LA
USA-Mineral Management Service- OCS-G 24001***	Manti Resources, Inc.	5/1/2002	N/A
Mabel Isabel Molero Quatroy, et al *	Manti Resources, Inc.	5/9/2001	COB 696, Folio 731/MLB 113, Entry #384834, St. Bernard Parish, LA
LAC Real Estate Holdings, L.L.C.*	Louisiana Oil and Gas, Inc.	5/3/2001	COB 696, Folio 724/MLB 113, Entry #384833, St. Bernard Parish, LA
Biloxi Marsh Lands Corporation*	White Mountain Royalty Corporation	10/26/2000	Memo-COB 694,MLB 112,Entry 383297,St. Bernard Parish, LA
State of Louisiana - No. 17656	WLB Investments, Inc.	11/18/2002	COB 730, Folio 182/MLB 118, Folio 98, Entry #406251, St. Bernard Parish, LA, NA # 03-03420, Instrument # 251353, Orleans Parish, LA.
State of Louisiana - No. 17812	Manti Jamba,Ltd.,et al	5/19/2003	COB 738, Folio 793/MLB 121, Folio 54, Entry #413799,St. Bernard Parish, LA
State of Louisiana - No. 17389	Kalar Corporation	3/18/2002	COB 717, Folio 387/MLB 116, Folio 10, Entry #397920,St. Bernard Parish, LA
State of Louisiana - No. 17388	Kalar Corporation	3/18/2002	COB 717, Folio 375/MLB 116, Folio 9, Entry #397919,St. Bernard Parish, LA
State of Louisiana - No. 17387**	Kalar Corporation	3/18/2002	COB 717, Folio 363/MLB 116, Folio 8, Entry #397918,St. Bernard Parish, LA
State of Louisiana - No. 17390	Kalar Corporation	3/18/2002	COB 717, Folio, 399,/MLB 116, Folio 11, Entry #397921,St. Bernard Parish, LA

* = INSOFAR AND ONLY INSOFAR as said leases fall within the confines of unit tract numbers 1A and 1B within the CRIS 1 RA SUC, established by Office of Conservation Order No. 960-A-2, effective April 9, 2002, and approved by the Office of Conservation on November 4, 2003.

** = LESS AND EXCEPT measured depths from the surface of the earth down to the stratigraphic equivalent of the bottom of the producing sand found between the depths of 4,926' and 5,018' in the Manti Operating Company State Lease No. 17387 No. 1 Well situated thereon.

***Subject to a 3.5% overriding royalty interest, in favor of J. Michael Poole, Sr., pursuant to Article 4.01 in that certain Exploration Joint Venture Agreement between Manti Resources, Inc., and Sunbelt Energy, Ltd., et al, dated May 1, 2001. 

[*] SAVE AND EXCEPT that certain royalty interest purchased from Biloxi Marsh Lands Corporation in favor of Manti Operating Company, effective May 24, 2001, recorded in COB 696, MLB 113, Entry No. 384864, in the official records of St. Bernard Parish, Louisiana.

EXHIBIT “B”

To Management Agreement between

CAPCO OFFSHORE, INC. and HOACTZIN PARTNERS, L.P.

OPERATING AGREEMENT

EXHIBIT “C”

To Management Agreement between

CAPCO OFFSHORE, INC. and HOACTZIN PARTNERS, L.P.

WARRANT FOR ISSUANCE OF STOCK

EX-10.17

Exhibit 10.17

FUNDING AGREEMENT

by and between

DOMAIN DEVELOPMENT PARTNERS I, LP,

and

CAPCO OPERATING CORPORATION,

Dated

September 15th, 2005

TABLE OF CONTENTS

		Page
1.	DEFINITIONS	1
2.	TERM	5
3.	PARTICIPATION	5
4.	PAYMENTS	6
5.	DISPOSAL; SALE OF CONTRACT AREA.	8
6.	REPRESENTATIONS AND WARRANTIES	12
7.	COVENANTS.	15
8.	TERMINATION	17
9.	CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY	19
10.	NOTICES	20
11.	MISCELLANEOUS PROVISIONS	21
12.	SEVERABILITY; SAVINGS CLAUSE	22
13.	TITLE WARRANTY	22
14.	FORCE MAJEURE	23
15.	RELATIONSHIP OF THE PARTIES	23
16.	WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC.	23
17.	GOVERNMENT APPROVALS	24
18.	PUBLIC ANNOUNCEMENTS	24
19.	MODIFICATION OF EXHIBITS	24
20.	EXPENSES	24
21.	NO LIABILITY; INDEMNITY	25
22.	COUNTERPARTS	26
23.	JOINT ACKNOWLEDGEMENT	26

EXHIBITS
Exhibit A	Contract Area
Exhibit A-1	Schedule of Leases
Exhibit B	Computations
Exhibit C	Financial Accounting Procedures
Exhibit D	Form of Assignment of Net Profits Interest
Exhibit E	Form of Mortgage

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FUNDING AGREEMENT

This Funding Agreement (this “Agreement”) is entered into this 1st day of October, 2005, among Domain Development Partners I, LP, a Texas limited partnership (“Domain”), and Capco Operating Corporation (“COC”), a Texas based Operating Company of Capco Energy, Inc. Domain and COC may be referred to individually as a “Party” and collectively as the “Parties”.

WHEREAS, COC owns and operates certain oil and gas leases, minerals and other interests in the Brazos Blocks 440/478/479, Brazos (Matagorda) County, Texas, as more particularly described in Exhibit A attached hereto (the “Contract Area”); and

WHEREAS, the Parties desire to work together for the purpose of exploiting and developing the hydrocarbon potential from currently owned and operated oil and gas interests of COC in the Contract Area;

WHEREAS, COC has requested that Domain provide funding for the re-development of the Contract Area; and

WHEREAS, Domain is willing to provide such funding on the terms and conditions set forth herein;

NOW, THEREFORE, in consideration of the mutual promises, conditions and agreements herein contained, the sufficiency of which is hereby acknowledged, the Parties agree as follows:

DEFINITIONS

For purposes of this Agreement, including the Exhibits, except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Article have the meanings assigned to them herein and the capitalized terms defined elsewhere in this Agreement by inclusion in quotation marks and/or parentheses have the meanings so ascribed to them.

“AFE” means an Authority for Expenditure prepared by or on behalf of COC for the purpose of estimating the well costs to be incurred in connection with a proposal to workover, plugback, complete or re-complete, drill, deepen, rework or sidetrack a ReWork Well.

“Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling or controlled by or under common control with such Person. For purposes of this definition, the term “control”, including, with correlative meanings, the terms “controlling”, “controlled by” and “under common control with”, as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management of such Person, whether through ownership of voting securities, by contract or otherwise. With respect to a corporation, partnership or limited liability company “control” is conclusively established ownership of fifty percent (50%) or more of the voting stock in such corporation or of the voting interest as a partner in such partnership or as a member of such limited liability company.

“Agreement” means this Funding Agreement between the Parties, including the Exhibits attached hereto or referred to herein.

“Business Day” means any day that is not a Saturday, Sunday, or legal holiday recognized by the United States of America or a day on which banks in Houston, Texas are authorized or required by law to be closed.

“Cash Method of Accounting” means a method of accounting in which (i) the Gross Proceeds for a Month shall be the net amount recognized and recorded by COC during such Month in COC’s ledgers for sales of Hydrocarbon Production from the Subject Properties included in a Tranche and (ii) the Production Costs for a Month shall be the amount paid or charged to the Subject Properties included in a Tranche by COC and recorded during such Month in the COC’s ledgers for operating the Subject Properties, all such proceeds and costs being determined in accordance with Exhibit B attached hereto. Accordingly, by way of example only, sales of January production of Hydrocarbon Production will normally be used to determine Gross Proceeds for the Month of March if the proceeds of such sales are received in March. No Gross Proceeds nor Production Costs for a Subject Property shall be recognized for Production Month Proceeds accrued prior to the Effective Date for such Subject Property.

“Contract Area” means the geographic area encompassing portions in Brazos Blocks 440/478/479, Brazos (Matagorda) County, Texas, as further described in Exhibit A attached hereto, as may be amended from time to time by mutual agreement of COC and Domain.

“Contribution” is defined in Article 3.3.

“Domain’s Capital Contribution” means the aggregate Contributions provided by Domain pursuant to this Agreement for 100% of Domains investment in each Tranche of wells in the Contract Area.

“Effective Date” means the effective date of this Agreement, being October 1st, 2005.

“Exhibits” means the exhibits to this Agreement, as such exhibits may be amended from time to time by a writing approved, dated and executed by all Parties.

“GAAP” means generally accepted accounting principles and practices which are recognized as such by the Financial Accounting Standards Board (or any generally recognized successor).

“Gross Proceeds” means for a Month, as to the Subject Properties included in any Tranche, the amount when received, on the Cash Method of Accounting, by COC, without duplication, from the sale of Hydrocarbon Production produced from the Subject Properties included in such Tranche for such Month, subject to the provisions of Exhibit B attached hereto.

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“Hydrocarbon Production” means, as to the Subject Properties included in any Tranche for any Month, the total number of barrels of crude oil, condensate and other liquid hydrocarbons and cubic feet of natural gas and other gaseous hydrocarbons production from such Subject Properties as measured in MMBtus under standard temperature and pressure conditions during such Month.

“MMBtus” means one million British Thermal Units.

“Month” means the period beginning at noon hour Central time on the first day of any calendar month and ending at the same time on the first day of the next succeeding calendar month.

“Net Profit” is defined as to each Tranche, and on a Tranche by Tranche basis, for each Month as the Gross Proceeds of COC from the Subject Properties included in a Tranche in such Month less (a) royalties, production, severance and ad valorem taxes, and operating expenses, attributable to such Tranche, and (b) Production Costs paid with respect to the Subject Properties included in such Tranche during such Month, all as calculated in accordance with Exhibit B attached hereto and other provisions of this Agreement.

“Net Profits Account” is defined in Article 4.8.

“Net Profits Interest” is defined in Article 4.1.

“Net Revenue Interest” means the percentage of hydrocarbon production from the Subject Properties that is remaining after the hydrocarbon production necessary to satisfy all royalty, overriding royalty, production payments and other burdens on production has been deducted.

“NPI Payment” means each payment made to Domain pursuant to Article 4.3 in consideration for Domain’s Capital Contribution.

“Operating Account” means the account established by the Operator of Record, COC for the purpose of this Project.

“Payout” means, with respect to each Tranche, that respective point in time at which the total of the NPI Payments received by Domain with respect to such Tranche is equal to one hundred fifty percent (150%) of Domain’s Capital Contribution in such Tranche.

“Person”means, and shall be interpreted broadly to include, without limitation, any individual, corporation, association, company, limited liability company, trust, estate, partnership, limited partnership, joint venture, unincorporated organization, other business entity, any government or any department or agency thereof, or any other legal entity.

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“Production Costs” means the direct costs incurred by COC and the overhead allowed by Domain in the operations of the Subject Properties calculated in accordance with Exhibit B hereto.

“Project” means the well re-activation project in the Contract Area contemplated by this Agreement.

“Prudent Standards” means the standards of reasonable and prudent business judgment and sound oil and gas field practices, in compliance with applicable federal, state and local laws, rules and regulations.

“Representative(s)”means the directors, officers, supervisors, employees, partners, lenders, consultants, attorneys and legal counsel, financial advisors, accountants, marketing representatives and other agents of the Parties.

“Re-Work Well”means a well on which activity (re-completion or re-entry operations, facilities upgrades and sidetracking or deepening) is conducted within the limits of any productive reservoir in a discovered field to allow production of any reserves.

“Spud Date”means the date upon which Re-Work activities are initiated on a specified well in a Tranche.

“Subject Properties”means all right, title, interest or claim (of every kind and character, whether legal or equitable and whether vested or contingent) of COC in and to the oil and gas leases covering land in the Contract Areas.

“Third Party”means a Person not a Party to this Agreement.

“Total NPI Payment” means, with respect to any Tranche, the total of the payments Domain is entitled to receive for such Tranche pursuant to Article 0.

“Total Well Costs” means, with respect to any Tranche, the (a) actual costs and expenses attributable to the entire Working Interest in the Subject Properties with respect to such Tranche, for, re-completion, drilling or workover, completion for production, construction of and connecting into new or reworked gathering systems, access and connection into third party high pressure or intermediate pressure pipelines, workovers, sidetracking, or deepening that are directly or indirectly related to the Project.

“Tranche” means each group of five potential ReWork Wells to be drilled, deepened or recompleted on the Subject Properties that are designated by Domain for funding pursuant to Article 0. In the event that five hundred thousand dollars ($500,000) or more is spent on any single Trance, the Tranche may be redefined by Domain to be less than five (5) wells.

“Working Interest” means that portion of the working interest ownership in a given well attributable to the ownership of COC of the Subject Property on which the well is located (including farm-in interests and other related interests and including any interests allocated to them in accordance with any pooling or unitization agreement or order of applicable governmental agency).

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TERM

This Agreement shall remain in force and effect for a period of three (3) years beginning on the Effective Date of this Agreement (“Primary Term”) and shall continue from year to year thereafter (each a “Renewal” or “Renewal Term”) unless sooner terminated in accordance with Article 8. Upon termination of this Agreement pursuant to this Article 0, Article 8, or as elsewhere herein provided Domain shall retain its Net Profits Interests in wells located in the Subject Properties, and Domain shall be entitled to, and shall continue to, receive NPI Payments as provided under Article 4. The confidentiality provisions of Article 9 shall continue for eighteen (18) months after the date of any termination of this Agreement.

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PARTICIPATION

Funding. Within thirty (30) days of the Effective Date, Domain shall elect the first Tranche of 5 wells that will be covered by this agreement and shall fund the project. Domain shall have the right, but not the obligation, to designate up to three Tranche’s during the term of this Agreement. The Tranche wells may be modified by Domain depending on the results and interpretations found during the operations, provided that any replacement wells are located in the Contract Area. Subject to the terms and conditions hereof, Domain agrees to fund Domain’s Capital Contribution with respect to each Tranche designated by Domain hereunder and to receive in consideration for such funding, the NPI Payments.

Domain’s Capital Contributions. Domain and COC shall set a schedule of working capital for use on the first 5 well Tranche, setting forth budgetary AFE’s for all the work required including but not limited to such key concerns as equipment and personnel mobilization and fees, supervision and well service expenditures. Domain’s expenditures on the facilities and the surface production infrastructure shall be limited to the amounts allocated in the program AFE’s. COC will be responsible in all respects for the land, legal and regulatory preparedness and production accounting for the Contract Area. COC shall be responsible for all costs not covered in the program AFE’s. Payments for the programmed AFE costs in the Contract Area shall be made by COC from a Project Operating Account established for this Agreement. Payments made from that account shall be subject to Domain’s approvals.

Contribution. The parties agree to contribute to the Project as outlined below;

COC shall make available personnel and resources including but not limited to those below available at no cost to Domain or the programs;

·   Engineer, Flint Emmons on an as needed basis

·   Field Superintendent, Kurt Endres on an as needed basis

·   Office staff in Houston for normal Operator related functions on an as needed basis

·   The platforms, the wells, the Wolverine Jackup, Royal Alliance supply vessel and related offshore miscellaneous equipment

Domains costs that will be included in the programs and that will be paid for through funding include but are not limited to;

·   All project direct personnel such as crews, supervisors and field specialists and consultants (including allocations for COC field personnel)

·   All project related third party services

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·   Equipment insurance, fueling and maintenance costs

·   Programmed upgrades to facilities included in program AFE’s

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PAYMENTS

Net Profits Interest. In consideration for Domain’s Capital Contribution, COC agrees to assign to Domain a secured net profits interest (the “Net Profits Interest”) in the Subject Properties included in any Tranche equal to (i) seventy-five percent (75%) of the Net Profits in proportion to COC’s interests from the date of first sale of Hydrocarbon Production from the first well completed or recompleted in such Tranche until Payout of the Tranche, and (ii) twenty-five percent (25%) of the Net Profits from such Subject Properties after Payout until the date on which the aggregate NPI Payments received by Domain with respect to such Tranche is equal to two hundred percent (200%) of Domain’s Capital Contribution in such Tranche, and (iii) zero at all times after the date on which the Total NPI Payments received by Domain with respect to such Tranche is equal to two hundred percent (200%) of Domain’s Capital Contribution in such Tranche. The Net Profits Interest is limited to the incremental production obtained through the efforts of this Project and excludes any production volumes or costs associated with the Subject Properties that existed prior to the Effective Date of this Agreement.

Stock. Domain shall have the right (such right to survive termination) at its sole discretion and for a period of two (2) years from the effective date of the Funding Agreement to acquire up to five million (5,000,000) shares of COC stock at 17.5 cents ($0.175) per share.

Payment.

Distribution of NPI Payments. Domain shall be entitled to receive NPI Payments beginning on the date of first sale of Hydrocarbon Production from the Subject Properties attributable to a Tranche and ending on the date on which the Total NPI Payments received by Domain with respect to such Tranche is equal to two hundred percent (200%) of Domain’s Capital Contribution in such Tranche.

Time for Payment. NPI Payments attributable to a given Month’s Hydrocarbon Production shall be due and payable by COC to Domain not later than the first to occur of (i) sixty (60) days following the last day of the Month of production or (ii) thirty days (30) following receipt by COC of proceeds from applicable purchasers.

Assignment of Net Profits Interest. COC shall execute and file an Assignment of Net Profits Interest substantially in the form attached as Exhibit D on all the wells included in the Subject Properties within 60 days of Domain’s funding of the first Tranche. COC shall warrant its title interest in the Subject Properties in the form shown in the Assignment of Net Profits Interest attached hereto.

Mortgage. As security for the payment and performance of all of COC’s obligations to Domain hereunder and within thirty (30) days of the first funding for a Tranche, COC shall execute and acknowledge one or more Mortgages, Assignments of Production and Security Agreements in the form of Exhibit E attached hereto and made a part hereof for all purposes (the “Mortgage”), covering the Subject Properties included in such Tranche. Domain shall file the Mortgage in all appropriate records to properly perfect the lien and security interests created thereunder. In addition, COC shall, from time to time, execute all such further and additional instruments as Domain may reasonably request in order to properly perfect the lien and security interests created under each Mortgage. COC hereby authorizes Domain to file one or more financing statements naming COC as debtor and covering the Subject Properties described in Schedule A to each Mortgage.

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Prices for Calculation of Gross Proceeds and NPI Payments. The actual amounts received by COC for the sale of oil, gas and other associated hydrocarbons from the Subject Properties as set out in bona fide contracts between COC and a Third Party purchaser shall be used to determine Gross Proceeds and in the calculation of the NPI Payments.

Interest on Past Due Payments. Any amount owed to Domain hereunder and not paid by COC when due shall bear, and COC, will pay, interest at a rate of 1.5% per month.

Net Profits Account. An account (the “Net Profits Account”) shall be maintained by COC for the Subject Properties. The Net Profits Account shall be credited with the aggregate of any Net Profit received by COC. On or before the date of each payment as set forth in Article 4.3.2 hereof, COC shall furnish to Domain a detailed statement clearly reflecting the credits and debits against and the balance of the Net Profits Account as of the close of business on the last day of the preceding Month. For each Month that the Net Profits Account contains funds, payment to Domain of NPI Payments shall be accomplished by wire transfer to Domain’s banking account, pursuant to the instructions set forth in Exhibit C. Following any such payment, the balance of the Net Profits Account shall be reduced by the amount of such payment.

DISPOSAL; SALE OF CONTRACT AREA.

Domain’s Right of First Refusal and Preferential Rights.

In the event COC elects to dispose, by sale, transfer, assignment, conveyance or otherwise (including any change of control), all or any part of its interests in the Contract Area (the “Offered Interests”) during the term of this Agreement, or at any time during which Domain is entitled to receive NPI Payments, to any Person, COC shall send a written notice (an “Offer”) to Domain offering to sell the Offered Interests to Domain and setting forth COC’s asking price. Domain shall have the right for a period of thirty (30) days following its receipt of an Offer, but not the obligation, to purchase the Offered Interests at COC’s asking price set forth in the Offer. In the event Domain elects to not exercise its option to purchase the Offered Interests, COC may then market the Offered Interests to Third Parties.

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If COC receives an offer for the Offered Interests at a selling price less than that set forth in the Offer, COC must promptly provide written notice of such offer to Domain, which notice must also (i) include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase price, and all other terms of the desired transaction (collectively the “Desired Terms”), (ii) include a copy of any proposed or executed written agreement the sets forth theDesired Terms, including all exhibits, schedules and related agreements, and (iii) be accompanied by a written purchase and sale (“Sales Offer”) signed by COC that provides for sale of all of the Offered Interest, or if a change of control, the Offered Interest that will be affected by the change of control. The Sales Offer shall provide for the sale of the Offered Interests to Domain on the same terms as the Desired Terms, provided that the Sales Offer shall not include any terms or conditions that were primarily included for the purpose of defeating or avoiding this preferential purchase right. Domain shall then have the right, for a period of thirty (30) calendar days (“Exercise Period”) after the notice and Sales Offer is delivered, to purchase the Offered Interests on the Desired Terms, except for any terms or condition that were primarily included for the purpose of defeating or avoiding the preferential purchase right contained herein. Domain shall be deemed to have exercised its preferential purchase right on the date that it executes and returns the Sales Offer, on the same terms as the Desired Terms (except for any terms or condition that were primarily included for the purpose of defeating or avoiding the preferential purchase right contained herein). If Domain does not exercise its preferential purchase right, then COC may enter into a binding agreement or proceed to close on any such agreement already executed to transfer such Offered Interest or cause a change of control with any party, on terms and conditions no less favorable to COC than the Desired Terms, during a period (“Third Party Sale Period”) ending thirty (30) days after the Exercise Period. If however, no such binding agreement is entered into during the Third Party Sale Period, then no sale or change of control may thereafter be entered into by COC without first again complying with this section.

Notwithstanding the foregoing, COC may not sell, transfer, assign, convey or otherwise dispose of all or any part of its interests in the Contract Area or the Subject Properties to a Third Party during the term of this Agreement or at any time during which Domain is entitled to receive NPI Payments unless (i) COC retains all obligations and liabilities it has assumed under this Agreement including, but not limited to, the obligation to pay to Domain the NPI Payments, (ii) the transferee agrees to take the interest in the Contract Area subject to the terms of this Agreement and the Net Profits Interest, and (iii) such disposal has no effect on the Net Revenue from which the Net Profits are derived.

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Right of First Refusal and Preferential Rights of COC.

In the event Domain elects to dispose, by sale, transfer, assignment, conveyance or otherwise (including any change of control), all or any part of its interests in the Contract Area (“Domain’s Interests”) during the term of this Agreement, Domain shall send a written notice (a “Domain Offer”) to COC offering to sell Domain’s Interests to COC and setting forth Domain’s asking price. COC shall have the right for a period of thirty (30) days following its receipt of a Domain Offer, but not the obligation, to purchase Domain’s Interests at Domain’s asking price set forth in the Domain Offer. In the event COC elects to not exercise its option to purchase Domain’s Interests, Domain may then market Domain’s Interests to Third Parties.

If Domain receives an offer for Domain’s Interests at a selling price less than that set forth in the Domain Offer, Domain must promptly provide written notice of such offer to COC, which notice must also (i) include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase price, and all other terms of the desired transaction (collectively the “Domain Terms”), (ii) include a copy of any proposed or executed written agreement the sets forth theDomain Terms, including all exhibits, schedules and related agreements, and (iii) be accompanied by a written purchase and sale (“Sales Agreement”) signed by Domain that provides for sale of all of Domain’s Interests, or if a change of control, Domain’s Interests that will be affected by the change of control. The Sales Agreement shall provide for the sale of Domain’s Interests to COC on the same terms as the Domain Terms, provided that the Sales Agreement shall not include any terms or conditions that were primarily included for the purpose of defeating or avoiding this preferential purchase right. COC shall then have the right, for a period of thirty (30) calendar days (“Determination Period”) after the notice and Sales Agreement is delivered, to purchase Domain’s Interests on the Domain Terms, except for any terms or condition that were primarily included for the purpose of defeating or avoiding the preferential purchase right contained herein. COC shall be deemed to have exercised its preferential purchase right on the date that it executes and returns the Sales Agreement, on the same terms as the Domain Terms (except for any terms or condition that were primarily included for the purpose of defeating or avoiding the preferential purchase right contained herein). If COC does not exercise its preferential purchase right, then Domain may enter into a binding agreement or proceed to close on any such agreement already executed to transfer Domain’s Interests or cause a change of control with any party, on terms and conditions no less favorable to Domain than the Domain Terms, during a period (“Sale Period”) ending thirty (30) days after the Determination Period. If however, no such binding agreement is entered into during the Sale Period, then no sale or change of control may thereafter be entered into by Domain without first again complying with this section.

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Notwithstanding the foregoing, Domain may not sell, transfer, assign, convey or otherwise dispose of all or any part of its interests in the Contract Area or the Subject Properties to a Third Party during the term of this Agreement or at any time during which Domain is obligated to fund Domain’s Capital Contribution unless (i) Domain retains all obligations and liabilities it has assumed under this Agreement including, but not limited to, the obligation to fund Contributions, (ii) the transferee agrees to take the interest in the Contract Area subject to the terms of this Agreement and to be jointly and severally liable with Domain for Domain’s obligations under this Agreement, whether accruing before or after the date of the assignment, and (iii) such transferee is financially and operationally capable of discharging the obligations it assumes under this Agreement.

Change of Control. For purposes of Articles 5.1 and 5.2, in the case of a change of control or package sale that includes all or part of COC’s or Domain’s interest in an Offered Interest or Domain’s Interest, as applicable, or if the proposed transaction is structured as a non-simultaneous, like-kind exchange under Section 1031 of the Internal Revenue Code of 1986, as amended (“Code”), the interest that is subject to Article 5.1 or 5.2, as applicable, shall be separately valued and the applicable notice shall state the value attributed to such interest by the prospective transferee and attributed to each of the other properties included in the desired transaction. A “change of control” shall mean, for purposes of this section, any one of the following circumstances: any person shall have become the beneficial owner of or shall have acquired, directly or indirectly, securities or ownership interest of COC or Domain, representing 50% or more (in addition to his current holdings) of the combined voting power of COC’s or Domain’s, as applicable, then outstanding voting securities or interests. However, there shall be no right of first refusal preferential right to purchase in those cases where a party desires 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

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Sale of Contract Area.

In the event the Parties desire to jointly market their interests in the Contract Area, the Parties shall engage an Engineering Consultant mutually agreeable to Domain and COC to determine the value of the Subject Properties in the Contract Area (“Property Value”) and the value of all future NPI Payments which Domain would be entitled to receive attributable to Tranches completed in the Contract Area at the time of the valuation (“Domain’s Value”). Said valuation shall be conducted in accordance with generally accepted engineering principles utilizing the discounted cash flow method using a ten percent (10%) discount rate. The valuation shall determine the value of existing producing wells, proved non-producing zones or recompletion and workover objectives, proved undeveloped locations and other probable and possible drilling locations and potential reserves within the Contract Area. In determining Domain’s Value, the Engineering Consultant shall utilize the time to reach Payout from the most recently completed or partially completed Tranche. The valuation shall separately set out the value attributable to Domain and COC expressed in dollars and as a percentage of the total appraised value. The cost of such valuation shall be borne equally by the COC and Domain. For purposes of making the valuation, the sales price set out in bona fide contracts between COC and a Third Party purchaser shall be used by the Engineering Consultant to calculate the PropertyValue. As used herein, the term “Engineering Consultant” means any of (i) Ryder Scott Petroleum Consultants, (ii) Netherland, Sewell and Associates, (iii) Degoyler and McNaughton, (iv) Cawley-Gillespie, or (v) Sproule Associates, Inc.

If the Parties receive an offer from a Third Party with a purchase price and other terms acceptable to the Parties, no later than ninety (90) days following the determination of the Domain Values, within thirty (30) Business Days of receipt of such offer, Domain shall send notice to COC of Domain’s election to either (i) require that the buyer, assignee or transferee shall agree to acquire the interests subject to the terms of this Agreement and the Net Profits Interest, or (ii) receive a lump sum payment (a “Disposal Payment”) from COC in lieu of its entitlement to receive any further NPI Payments under this Agreement. Disposal Payments shall be equal to the Domain Value.

In the event the Parties consummate a sale of the Contract Area and Domain has elected to receive a Disposal Payment, Domain shall terminate its Net Profits Interest and Mortgage, upon receipt by Domain of the Disposal Payment. The Disposal Payment shall be made by the purchaser directly to Domain by wire transfer in immediately available funds on the same date that COC receives funds attributable to the sale.

REPRESENTATIONS AND WARRANTIES

Domain represents to COC, as of the Effective Date, that:

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Organization and Existence. Domain is a limited partnership duly organized and legally existing under the laws of Texas.

Power and Authority. Domain has full partnership power and authority to execute, deliver, and perform this Agreement and each other agreement, instrument, or document executed or to be executed by Domain in connection with the transactions contemplated hereby to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery, and performance by Domain of this Agreement and each other agreement, instrument, or document executed or to be executed by Domain in connection with the transactions contemplated hereby to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary partnership action of Domain.

Valid and Binding Agreement. This Agreement has been duly executed and delivered by Domain and constitutes, and each other agreement, instrument, or document executed or to be executed by Domain in connection with the transactions contemplated hereby to which it is a party has been, or when executed will be, duly executed and delivered by Domain and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of Domain, enforceable against it in accordance with their respective terms, except that such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors’ rights generally and (b) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.

Non-Contravention. The execution, delivery, and performance by Domain of this Agreement and each other agreement, instrument, or document executed or to be executed by Domain in connection with the transactions contemplated hereby to which it is a party and the consummation by it of the transactions contemplated hereby and thereby do not and will not (a) conflict with or result in a violation of any provision of the partnership agreement or other governing instruments of Domain, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other instrument or obligation to which Domain is a party or by which Domain or any of its properties may be bound, (c) result in the creation or imposition of any lien or other encumbrance upon the properties of Domain, or (d) violate any applicable law, rule or regulation binding upon Domain.

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Approvals. No consent, approval, order, or authorization of, or declaration, filing, or registration with, any court or governmental agency or of any third party is required to be obtained or made by Domain in connection with the execution, delivery, or performance by Domain of this Agreement and each other agreement, instrument, or document executed or to be executed by Domain in connection with the transactions contemplated hereby to which it is a party or the consummation by it of the transactions contemplated hereby and thereby.

Pending Litigation. There are no pending suits, actions, or other proceedings in which Domain is a party which affect the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

COC represents to Domain, as of the Effective Date, that:

Organization and Existence. COC is duly organized, legally existing and in good standing under the laws of jurisdiction of organization and is qualified to do business in the state of Texas.

Power and Authority. COC has full corporate power and authority to execute, deliver, and perform this Agreement and each other agreement, instrument, or document executed or to be executed by COC in connection with the transactions contemplated hereby to which it is a party and to consummate the transactions contemplated hereby and thereby. The execution, delivery, and performance by COC of this Agreement and each other agreement, instrument, or document executed or to be executed by COC in connection with the transactions contemplated hereby to which it is a party, and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action of COC.

Valid and Binding Agreement. This Agreement has been duly executed and delivered by COC and constitutes, and each other agreement, instrument, or document executed or to be executed by COC in connection with the transactions contemplated hereby to which it is a party has been, or when executed will be, duly executed and delivered by COC and constitutes, or when executed and delivered will constitute, a valid and legally binding obligation of COC, enforceable against it in accordance with their respective terms, except that such enforceability may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors’ rights generally and (b) equitable principles which may limit the availability of certain equitable remedies (such as specific performance) in certain instances.

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Non-Contravention. The execution, delivery, and performance by COC of this Agreement and each other agreement, instrument, or document executed or to be executed by COC in connection with the transactions contemplated hereby to which it is a party and the consummation by it of the transactions contemplated hereby and thereby do not and will not (a) conflict with or result in a violation of any provision of the governing instruments of COC, (b) conflict with or result in a violation of any provision of, or constitute (with or without the giving of notice or the passage of time or both) a default under, or give rise (with or without the giving of notice or the passage of time or both) to any right of termination, cancellation, or acceleration under, any bond, debenture, note, mortgage, indenture, lease, contract, agreement, or other instrument or obligation to which COC is a party or by which COC or any of its properties may be bound, (c) result in the creation or imposition of any lien or other encumbrance upon the properties of COC, or (d) violate any applicable law, rule or regulation binding upon COC.

Approvals. No consent, approval, order, or authorization of, or declaration, filing, or registration with, any court or governmental agency or of any third party is required to be obtained or made by COC in connection with the execution, delivery, or performance by COC of this Agreement and each other agreement, instrument, or document executed or to be executed by COC in connection with the transactions contemplated hereby to which it is a party or the consummation by it of the transactions contemplated hereby and thereby.

Pending Litigation. There are no pending suits, actions, or other proceedings in which COC is a party which affect the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

COVENANTS.

Books, Financial Statements and Reports. COC will at all times maintain full and accurate books of account and records. COC will maintain a standard system of accounting, will maintain its Fiscal Year, and will furnish the following statements and reports to Domain at COC’s expense:

As soon as available, and in any event within ninety (90) days after the end of each Fiscal Year, complete consolidated financial statements of COC together with all notes thereto, prepared in reasonable detail in accordance with GAAP, together with an unqualified opinion, based on an audit using generally accepted auditing standards, [by a “Big Four” public accounting firm or] another independent certified public accounting firm selected by COC and acceptable to Domain, stating that such consolidated financial statements have been so prepared. These financial statements shall contain a consolidated balance sheet as of the end of such Fiscal Year and consolidated statements of earnings, of cash flows, and of changes in owners’ equity for such Fiscal Year, each setting forth in comparative form the corresponding figures for the preceding Fiscal Year.

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By March 1 of each year, an Engineering Report prepared by *[Ryder Scott Company/Netherland, Sewell & Associates/H.J. Gruy and Associates/DeGolyer & MacNaughton/Williamson Petroleum Consultants, Inc.], or other independent petroleum engineers chosen by COC and acceptable to Domain, concerning the Subject Properties oil and gas properties and interests owned by any COC which are located in the Contract Lands and which have attributable to them proved oil or gas reserves. This report shall be satisfactory to Domain, shall take into account any “over-produced” status under gas balancing arrangements.

As soon as available, and in any event within forty-five (45) days after the end of each calendar month, a report describing by lease or unit the gross volume of Hydrocarbon Production and sales attributable to Hydrocarbon Production during such month from the Subject Properties and describing the related severance taxes, other taxes, leasehold operating expenses attributable thereto and incurred during such month.

As soon as available, and in any event within ten (10) days after the end of each calendar month, a report on Subject Properties setting forth the capital expenditures and Domain Capital Contributions made during such calendar month.

On the dates set forth in Exhibit C hereto, the financial reporting described therein.

Other Information and Inspections. COC will furnish to Domain any information which Domain may from time to time request concerning any of the Subject Properties or any matter in connection with COC’s businesses, properties, prospects, financial condition and operations, including all evidence which Domain from time to time reasonably requests in writing as to the accuracy and validity of or compliance with all representations, warranties and covenants made by any COC in this Agreement, and the satisfaction of all conditions contained herein, and all other matters pertaining thereto. COC will permit representatives appointed by Domain (including independent accountants, auditors, agents, attorneys, appraisers and any other Persons) to visit and inspect during normal business hours any of the Subject Properties in the Contract Area, including its books of account, other books and records, and any facilities or other business assets, and to make extra copies therefrom and photocopies and photographs thereof, and to write down and record any information such representatives obtain, and COC shall permit Domain or its representatives to investigate and verify the accuracy of the information furnished to Domain in connection herewith and to discuss all such matters with its officers, employees and representatives. COC shall permit Domain or its representatives to audit the books and records of COC in accordance with the terms of Exhibit C hereto.

Delay Rentals, Minimum Royalties, and Shut-in Gas Payments. COC shall use reasonable commercial efforts to pay, or cause to be paid, in a proper and timely manner any delay rentals, minimum royalties, and shut-in gas payments, if any, which may be necessary to maintain in force and effect the Subject Properties, except any portion thereof which the Parties have determined to abandon pursuant hereto. Notwithstanding anything to the contrary herein, COC shall not be liable to Domain for any failure to pay, or the incorrect payment of, any delay rentals, minimum royalty, shut-in gas payments, or any other contractual obligation of COC to royalty or working interest owners unless resulting from the gross negligence or willful misconduct of COC.

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Insurance. COC shall maintain, or cause to be maintained, during the life of the Net Profits Interest, insurance coverage in such amounts, with provisions for such deductible amounts, and for such purposes as are consistent with Prudent Standards and the requirements of any joint operating agreement related to Subject Properties.

Payment of Trade Liabilities. COC shall (i) timely file all required tax returns; (ii) timely pay all taxes, assessments and other governmental charges or levies imposed upon it or upon its income, profits or property; and (iii) within ninety (90) days after the sum becomes due pay all liabilities owed by it to Third Party vendors, suppliers and other Persons providing goods and services used by it in the ordinary course of its business. COC may, however, delay paying or discharging any of the foregoing so long as it is in good faith contesting the validity thereof by appropriate proceedings and has set aside on its books adequate reserves therefore. Without the consent of Domain, COC shall not undertake any single project with respect to the Subject Properties reasonably estimated to require expenditure in excess of Twenty Thousand Dollars ($20,000.00).

Prudent Operator Standard. COC will conduct and carry on or cause to be conducted and carried on the development, maintenance and operation of the Subject Properties in accordance with Prudent Operating Standards.

Plugging and Abandonment Costs. Except as otherwise herein provided and except as such charges may be provided for in Exhibit B, Domain shall not have any liability of any nature for the plugging or abandonment of any wells or the reclamation of facilities associated with the proper plugging and abandonment of any well for which Domain provides capital pursuant to this Agreement.

TERMINATION

Notwithstanding the provisions of Article 2, this Agreement may be terminated as follows:

Insolvency.

If COC becomes insolvent, makes a general assignment for the benefit of its creditors, applies for or consents to the appointment of a receiver, trustee or liquidation of all or substantially all of its assets, has an involuntary petition in bankruptcy filed against it which is not dismissed within forty-five (45) days or fails to pay its debts and obligations as they become due, Domain may, without prejudice to any of its other rights, immediately terminate this Agreement effective upon delivery of written notice of same to COC.

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If Domain becomes insolvent, makes a general assignment for the benefit of its creditors, applies for or consents to the appointment of a receiver, trustee or liquidation of all or substantially all of its assets, has an involuntary petition in bankruptcy filed against it which is not dismissed within forty-five (45) days or fails to pay its debts and obligations as they become due, COC may, without prejudice to any of its other rights, immediately terminate this Agreement effective upon delivery of written notice of same to Domain.

Breach.

If COC fails to pay any obligation under this Agreement within ten (10) Business Days after the same becomes due and payable, or if COC fails to duly observe, perform or comply with any other covenant, agreement, condition or provision of this Agreement and such failure remains unremedied for a period of thirty (30) days after notice of such failure is given by Domain to COC, Domain may, without prejudice to any of its other rights, immediately terminate this Agreement effective upon delivery of written notice of same to COC.

If Domain fails to pay any obligation under this Agreement within ten (10) Business Days after the same becomes due and payable, or if Domain fails to duly observe, perform or comply with any other covenant, agreement, condition or provision of this Agreement and such failure remains unremedied for a period of thirty (30) days after notice of such failure is given by COC to Domain, COC may, without prejudice to any of its other rights, immediately terminate this Agreement effective upon delivery of written notice of same to Domain.

Mutual Agreement. This Agreement may be terminated by mutual agreement of the Parties.

Domain Unilateral Termination. This Agreement may be terminated unilaterally by Domain upon thirty (30) days advance written notice to COC. Upon such termination, Domain shall retain the Net Profits Interest and continue to be entitled to receive NPI Payments with respect to any wells included in any Tranche’s as of the date of termination, and Payout shall be determined based on Domain’s Capital Contribution as of the date of termination.

Effect of Termination. Any termination shall not relieve any Party of its obligations arising from or incident to obligations under this Agreement prior to the time such termination becomes effective. Domain shall be entitled to receive NPI Payments, until the Total NPI Payments for all Tranche’s have been made. Alternatively, the Parties may agree upon a lump sum payment to be made by COC to Domain in lieu of Domain’s right to receive further NPI Payments under this Agreement. Such lump sum shall be calculated as the amount equal to the present value of Domain’s expected future NPI Payments on all Tranche’s using a ten percent (10%) discount rate. Upon a termination of this Agreement pursuant to this Article 8, Domain shall, at COC’s cost, execute and deliver partial releases of the Mortgage pursuant to which Domain will release its lien on the Subject Properties, except for any wells on which Domain has a Net Profits Interest. Upon the termination of this Agreement, the Parties shall be released from their obligations hereunder, provided that all indemnification obligations of the Parties shall survive such termination.

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CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY

Confidential Information. “Confidential Information” means information unavailable from public sources that any of the Parties consider confidential and proprietary information or data including, but not limited to, the substance or contents of this Agreement, seismic records and tapes, interpreted well logs or maps or engineering data, financial information relating to the Contract Area and certain non-proprietary seismic data licensed from Third Parties which impose various restrictions and limitations on the owner of such license to use, disclose and/or display such data relating to certain portions of the Contract Area.

Domain Nondisclosure. Domain agrees that any Confidential Information obtained by it from COC under the terms of this Agreement will be held in strict confidence and will not be disclosed by Domain to any Third Party without authorization from COC, as long as such information is not in the public domain or except as required by law or legal process. Domain agrees not to reproduce any Confidential Information of COC or to disclose such Confidential Information to any Third Party, in any manner whatsoever, without the express prior written consent of COC. Domain agrees to limit access to such Confidential Information only to those of its Representatives who have a need to review such Confidential Information for the purposes stated herein.

COC Nondisclosure. COC agrees that any Confidential Information obtained by it from Domain under the terms of this Agreement will be held in strict confidence and will not be disclosed by such party to any Third Party without authorization from Domain as long as such information is not in the public domain or except as required by law or legal process. COC agrees not to reproduce Domain’s Confidential Information or to disclose such Confidential Information to any Third Party, in any manner whatsoever, without the express prior written consent of Domain. COC agrees to limit access to such Confidential Information only to those of its Representatives who have a need to review such Confidential Information for the purposes stated herein. Domain hereby acknowledges that COC will, from time to time, be subject to joint interest billing (“JIB”) audits by working interest owners. Nothing contained in this Article 9 shall prevent COC from complying with the requests for information in such JIB audits to the extent such requests do not call for the disclosure of information which Domain considers to be confidential (except the substance or contents of this Agreement and documents related or generated pursuant to the payment provisions of this Agreement), proprietary or a trade secret.

Proceedings to Compel Disclosure. In the event a Party hereto, or its Representatives, is required by any court or legislative or administrative body to disclose any Confidential Information belonging to another Party, the Party required to make such disclosure shall provide the other Party with prompt notice of such requirement in order to afford the other Party the opportunity to seek an appropriate protective order. However, if the Party seeking to prevent the disclosure is unable to obtain or does not seek such protective order and the Party, or its Representatives, that is required to make such disclosure are, in the opinion of counsel, compelled to disclose Confidential Information under pain of liability for contempt or other censure penalty, disclosure of the Confidential Information may be made without liability.

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Injunctive Relief. In the event of breach or threatened breach by one Party or its employees of the provisions of this Article 9, the disclosing Party shall be entitled to an injunction or judicial order equivalent thereto restraining the first Party or its employees from using or disclosing, in whole or in part, such Confidential Information. Nothing herein shall be construed as prohibiting any Party from pursuing any other remedies available to it for such breach or threatened breach, including recovery of damages from the other Party.

Term of Confidentiality. The confidentiality obligations of each Party under this Article shall continue in full force and effect for a period of eighteen (18) months after the termination of this Agreement.

Non-Confidentiality for Tax Purposes. Notwithstanding anything else to the contrary in this Agreement, each Party to this Agreement (and each employee, representative, or other agent of such Party) may disclose to any persons as required or allowed by applicable law, rule or regulation the tax treatment and tax structure of the transaction contemplated by this Agreement (the “Transaction”) and all materials of any kind (including opinions or other tax analyses) that are provided to such Party relating to such tax treatment and tax structure. Nothing in this Agreement, or any other agreement between the Parties hereto, whether express or implied, shall be construed as limiting in any way the ability of any Party to consult with any tax advisor independent from all other entities involved in the Transaction regarding the treatment, tax structure or tax consequences of the Transaction.

NOTICES

Any notice, transmittal of documents, correspondence or other communication between the Parties shall be in writing, addressed to the Party to whom sent and transmitted prepaid either by air courier or by telecopy or other facsimile transmission with signed written original to follow by air courier. All such notices in compliance with this provision shall be deemed received by such Party on the next Business Day after transmission by telecopy or other facsimile transmission and on the third Business Day after transmission by air courier. For purposes of this Agreement, the addresses of the Parties are as follows until changed by written notice from the Party desiring to change its address to the other Party:

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DOMAIN:

Domain Development Partners I, LP

10000 memorial Dr.

Suite 550

Houston, Tx, 77024

Telephone:	713-579-2623
Facsimile:	713-579-2611
Attention:	Domain Energy Partners, LP

COC:

COC Energy Inc.

[Address]

Telephone:

Facsimile:

Attention:

MISCELLANEOUS PROVISIONS

Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas.

Dispute Resolution. Any dispute or controversy between the Parties arising out of or related to this Agreement shall be finally settled by binding arbitration between the Parties pursuant to the commercial arbitration rules of the American Arbitration Association (“AAA”). The arbitration shall be conducted in Houston, Texas before a single arbitrator to be selected jointly by the Parties. In the event the Parties are unable to agree upon an arbitrator within thirty (30) days of the date on which the notice of arbitration is served, the arbitrator shall be selected by AAA. The arbitration award may be enforced by application to any court of competent jurisdiction.

Amendment; No Waiver. No modification of this Agreement shall be of any force or effect unless in writing and signed by an authorized signatory of all Parties. Failure to enforce any or all of the terms and conditions of this Agreement in a particular instance or instances shall not constitute a waiver thereof or preclude subsequent enforcement thereof.

Assignment. COC may not assign its rights or obligations under this Agreement without the prior written consent of Domain. Domain shall have the right to assign its rights and obligations under this Agreement to an Affiliate, without prior consent of COC. Domain will not transfer or assign its rights and obligations under this Agreement, except its right to receive payments hereunder, to a non-Affiliate without first obtaining the written consent of COC, which consent shall not be unreasonably withheld or delayed.

Rules of Construction. All references in this Agreement to articles, sections, subsections and other subdivisions refer to corresponding articles, sections, subsections and other subdivisions of this Agreement unless expressly provided otherwise. Titles appearing at the beginning of any of such subdivisions are for convenience only and shall not constitute part of such subdivisions and shall be disregarded in construing the language contained in such subdivisions. The words “this Agreement”, “this instrument”, “herein”, “hereof”, “hereunder”‘ and words of similar import refer to this agreement as a whole and not to any particular subdivision unless expressly so limited. Unless the context otherwise requires: “including” and its grammatical variations mean “including without limitation”; “or” is not exclusive; words in the singular form shall be construed to include the plural and vice versa; words in any gender include all other genders; references herein to any instrument or agreement refer to such instrument or agreement as it may be from time to time amended or supplemented; and references herein to any Person include such Person’s successors and assigns. All references in this Agreement to exhibits and schedules refer to exhibits and schedules to this Agreement unless expressly provided otherwise, and all such exhibits and schedules are hereby incorporated herein by reference and made a part hereof for all purposes.

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SEVERABILITY; SAVINGS CLAUSE

Any provision or term of this Agreement which is or may be void or unenforceable shall, to the extent of such invalidity or unenforceability, be deemed severable and shall not affect any other provision of this Agreement. The Parties agree that the exculpatory, indemnification and hold harmless provisions applicable to this Agreement shall be modified or altered only insofar as required by a jurisdiction purporting to limit such provisions, it being the intention of the Parties to enforce to the fullest extent all terms and conditions herein agreed to.

TITLE WARRANTY

COC represents and warrants to Domain that it is the owner of the leasehold and/or fee mineral interests comprising the Subject Properties which it has represented or will represent to Domain it owns, that it will defend its title to such interests, that said interests are and that COC will take appropriate steps to maintain such interests in good standing and free and clear of all liens, charges, encumbrances and claims whatsoever, except liens in favor of Domain, and to the best knowledge of COC there is no claim, action or administrative proceeding pending which may jeopardize title to its interests. COC shall provide such documentation to Domain as Domain may reasonably require to satisfy itself that COC own such interests.

Any costs, expenses, losses or liabilities (including, but not limited to, attorneys fees’, court costs and litigation expenses) suffered by Domain as a result of COC’s failure to have good and defensible title to the Subject Properties free and clear of all burdens, encumbrances, liens (except liens in favor of Domain) and title defect including any claim that Domain must deliver or pay over to any Person any part of the Hydrocarbon Production or any proceeds thereof at any time previously received or thereafter to be received by Domain shall constitute a Contribution for any Tranche then open, or if no Tranche is then open, COC shall promptly reimburse and indemnify Domain for all such costs, expenses, losses or liabilities.

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FORCE MAJEURE

If, as a result of an event of Force Majeure, any Party is rendered unable, wholly or in part, to carry out its obligations under this Agreement, other than the obligation to pay any amounts due or to furnish security, then the obligations of the Party giving such notice, so far as and to the extent that the obligations are affected by such event of Force Majeure, shall be suspended during the continuance of any inability so caused, but for no longer period. The Party claiming Force Majeure shall notify the other Party of the Force Majeure situation within a reasonable time after the occurrence of the cause relied on and shall keep the other Party timely informed of all significant developments. Such notice shall give reasonably full particulars of said event of Force Majeure, and also estimate the period of time which said Party will probably require to remedy the Force Majeure. The affected Party shall use all reasonable diligence to remove or overcome the Force Majeure situation as quickly as possible in an economic manner, but shall not be obligated to settle any labor dispute except on terms acceptable to it and all such disputes shall be handled within the sole discretion of the affected Party.

For the purposes of this Agreement, “Force Majeure” shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, earthquake, explosion, governmental restraint, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the Party concerned.

RELATIONSHIP OF THE PARTIES

This Agreement is not intended to create, nor shall it be construed as creating, any joint venture, association, partnership, trust or fiduciary relationship nor shall it give rise to the imposition of a fiduciary obligation or liability with regard to any one or more of the Parties. In this Agreement, the Parties agree that where decisions are to be taken hereunder by unanimous agreement, agreement thereto shall not be unreasonably withheld.

WAIVER OF JURY TRIAL, PUNITIVE DAMAGES, ETC.

EACH OF DOMAIN AND COC HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH; (B) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH LITIGATION ANY “SPECIAL DAMAGES”, AS DEFINED BELOW, (C) CERTIFIES THAT NO PARTY HERETO NOR ANY REPRESENTATIVE OR COUNSEL FOR ANY PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS, AND D) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION, “SPECIAL DAMAGES” INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER PARTY HERETO.

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GOVERNMENT APPROVALS

From and after the execution hereof, each of the Parties hereto, without further consideration, shall use their best efforts to execute, deliver, submit, gain approvals of, and record, or cause to be executed, delivered, submitted, and recorded, good and sufficient permits, designations of operator forms, other regulatory documents and instruments, as applicable, and take such other action as may be reasonably required to carry out the purposes of this Agreement and to give effect to the covenants, stipulations and obligations of the Parties hereto.

PUBLIC ANNOUNCEMENTS

No Party will issue, or permit any agent or Affiliate of it to issue, any press releases or otherwise make, or cause any agent or Affiliate of it to make, any public statements with respect to the content of this Agreement and the transactions contemplated herein other than internal releases and statements to their respective partners, owners and Representatives upon commitment by such partners, owners and Representatives to maintain the confidentiality of such matters, without the prior written approval of the other Parties, which approval may be unreasonably withheld.

MODIFICATION OF EXHIBITS

It is understood that there may be a number of additional Exhibits and or amendments that may be necessary to fully address the financial and operational details of the various activities under this Agreement. The Parties agree to cooperate to obtain the execution of any documents necessary to carry out the intents of this Article.

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EXPENSES

Expenses incurred by Domain in this Article 20 shall be included by Domain as costs attributable to the program including but not limited to: (i) all transfer, stamp, mortgage, documentary or other similar taxes, assessments or charges levied by any governmental or revenue authority in respect of this Agreement or any other document or transaction referred to herein or therein, (ii) all reasonable costs and expenses incurred by or on behalf of Domain (including attorneys’ fees, consultants’ fees and engineering fees, travel costs and miscellaneous expenses) in connection with (1) the negotiation, preparation, execution and delivery of this Agreement, and any and all consents, waivers or other documents or instruments relating thereto, (2) the filing, recording re-filing and re-recording of any documents or instruments or further assurances required to be filed or recorded or re-filed or re-recorded by the terms of this Agreement, and (iii) all reasonable costs and expenses incurred by or on behalf of Domain (including without limitation attorney’s fees, consultants’ fees and accounting fees) in connection with the preservation of any rights, or the defense of Domain’s exercise of its rights thereunder.

NO LIABILITY; INDEMNITY

EXCEPT TO THE EXTENT OF DOMAIN’S OBLIGATIONS UNDER ARTICLE 3, AND ANY OF THE FOLLOWING ITEMS ARE TAKEN INTO ACCOUNT IN COMPUTING NET PROFITS UNDER THIS AGREEMENT, DOMAIN SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES OR LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING, DEVELOPING, OPERATING, OWNING, MAINTAINING, REWORKING OR RECOMPLETING OF THE SUBJECT PROPERTIES, TITLE DISPUTES RELATED TO THE SUBJECT PROPERTIES (INCLUDING REASONABLE ATTORNEY’S FEES, COSTS AND EXPENSES), THE PHYSICAL CONDITION OF THE SUBJECT PROPERTIES, OR THE HANDLING, TREATING OR TRANSPORTING OF HYDROCARBONS PRODUCED FROM THE SUBJECT PROPERTIES (INCLUDING ANY COSTS, EXPENSES, LOSSES OR LIABILITIES RELATED TO VIOLATION OF AN ENVIRONMENTAL LAW OR OTHERWISE RELATED TO DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT, WHETHER THE SAME ARISE OUT OF THE ACTIONS OF COC, OR THIRD PARTIES OR ARISE OTHERWISE).

COC AGREES TO INDEMNIFY AND HOLD DOMAIN HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES, LOSSES AND LIABILITIES INCURRED BY DOMAIN IN CONNECTION WITH ANYTHING SET OUT IN THE PARAGRAPH ABOVE OR IN CONNECTION WITH THE NET PROFITS INTEREST, THIS AGREEMENT, OR THE TRANSACTIONS AND EVENTS (INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF) AT ANY TIME ASSOCIATED WITH OR CONTEMPLATED IN ANYTHING SET OUT IN THE PARAGRAPH ABOVE. THE INDEMNITY SET OUT IN THIS ARTICLE 21 SHALL ALSO COVER ALL REASONABLE COSTS AND EXPENSES OF DOMAIN, INCLUDING REASONABLE LEGAL FEES AND EXPENSES, WHICH ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED AGAINST. AS USED IN THIS ARTICLE 21, “DOMAIN” MEANS DOMAIN AND ITS SUCCESSORS AND ASSIGNS, ITS AFFILIATES, AND ALL OF THE OFFICERS, DIRECTORS, AGENTS, BENEFICIARIES, TRUSTEES, ATTORNEYS AND EMPLOYEES OF DOMAIN AND ITS AFFILIATES.

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THE INDEMNITY SET OUT IN THIS ARTICLE 0 SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF DOMAIN AND SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON DOMAIN AS A RESULT OF ANY THEORY OF STRICT LIABILITY OR ANY OTHER DOCTRINE OF LAW, PROVIDED THAT THE INDEMNITY SET OUT IN THIS ARTICLE 0 SHALL NOT APPLY TO ANY COSTS, EXPENSES, LOSSES OR LIABILITIES INCURRED BY DOMAIN TO THE EXTENT PROXIMATELY CAUSED SOLELY BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF DOMAIN. THE INDEMNITY SET OUT IN THIS ARTICLE 0 SHALL SURVIVE THE TERMINATION OF THE NET PROFITS INTEREST AND OF THIS AGREEMENT AND THE OTHER DOCUMENTS RELATED HERETO.

COUNTERPARTS

This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one agreement.

JOINT ACKNOWLEDGEMENT

THIS WRITTEN AGREEMENT AND THE OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

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

DOMAIN DEVELOPMENT PARTNERS I, LP

By: ___________________________________________________ ,

Its General Partner, Domain Energy Partners, LP

By: ___________________________________________________

Name:

Title:

COC OPERATING COMPANY

By: ___________________________________________________

Name:

Title:

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Exhibit A

The Contract Area

29

EXHIBIT A-1

30

31

32

Exhibit B

Computations

Adjustments to Gross Proceeds

(a)If any gas is processed before the sale thereof, the amount of the Gross Proceeds for such gas shall be the Gross Proceeds for the sale of COC's proportionate share of the residue gas and liquid hydrocarbons attributable to the processed gas as determined by the processing agreement, if any, covering such gas or, if there is no gas processing agreement in place, COC's proportionate share of the wellhead volume multiplied by the Btu content.

(b)There shall be excluded any amount for Hydrocarbon Production attributable to non-consent operations conducted with respect to any Subject Property as to which COC shall be a non-consenting party and which is dedicated to the recoupment or reimbursement of costs and expenses of the consenting party or parties by the terms of the relevant operating agreement, unit agreement, contract for development or other agreement providing for such non-consent operations. Similar amounts received from non-consenting third parties shall be included in Gross Proceeds.

(c)If a controversy or possible controversy exists (whether by reason of any statute, order, decree, rule, regulation, contract or otherwise) between COC and any purchaser or any other third party as to the correct sales price or sales volume or COC proportionate share thereof of any Hydrocarbon Production produced from a Subject Property or as to the correct ownership of a Subject Property, then, amounts withheld by the purchaser or any such third party shall not be considered to be received by COC or part of the Gross Proceeds until actually collected by COC or the production there from.

(d)Gross Proceeds shall not include the value of any Hydrocarbon Production unavoidably lost or used in operations on any Subject Property and plant operations (including gas injection, compression, treating, transporting, secondary recovery, pressure maintenance, repressuring, recycling operations, plant fuel or shrinkage).

(e)There shall be excluded from Gross Proceeds any royalties, overriding royalties, production payments, and other burdens on the Hydrocarbon Production produced from the Subject Properties of record on or before _________________; provided however, if COC acquires an additional interest in a Subject Property after such date, then all royalties, production payments, and other burdens on such interest shall also be excluded from Gross Proceeds.

(f)Subject to (b) above, there shall be excluded from Gross Proceeds any revenues received by COC that are attributable to the net revenue interests of other working interest owners on the Hydrocarbon Production produced from any Subject Property.

(g)There shall be excluded from Gross Proceeds any amounts received by COC from a purchaser of Hydrocarbon Production as advance payments and payments pursuant to take-or-pay and similar provisions of sales contracts until such Hydrocarbon Production is actually produced and delivered to such purchaser.

(h)During any month when COC is, for any Subject Property, an Overproduced Party or an Underproduced Party under any gas balancing arrangement, there shall be included in Gross Proceeds amounts received by COC from a purchaser of Hydrocarbon Production or an Overproduced Party as and when paid to COC and when COC is required to make settlement in cash for any net overproduction, such payment shall be deducted from the Gross Proceeds, if any.

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(i)To the extent allocable to the Subject Properties, refunds of revenues previously included as Gross Proceeds for such Subject Property required to be made by COC (including any interest thereon or penalties) as a result of the bankruptcy, insolvency or similar condition of a purchaser of production or other party, an order of the Federal Energy Regulatory Commission, tax, or other governmental unit or any other legal reason shall be deducted from Gross Proceeds.

(j)If COC is an Overproduced Party on such Subject Property under any gas balancing arrangement and COC is required to make settlement in cash for any net overproduction, such payment shall be deducted from the Gross Proceeds for such Subject Property.

(k)To the extent allocable to a Subject Property, any amounts paid by COC as a prudent owner or operator, whether as refund, interest or penalty, to a purchaser because the amount initially received by COC as sales price attributable to Hydrocarbon Production Produced after the Effective Date for such Subject Property was more or allegedly more than permitted by the terms of any applicable contract, statute, regulation, order, decree or other obligation shall be deducted from Gross Proceeds.

(m)Insurance proceeds received by COC relating to any Subject Property if the proceeds therefore relate to costs which shall have been included in Production Costs shall be included in Gross Proceeds.

Calculation of Production Costs

Definitions:

"First Level Supervisors" means those employees whose primary function in Operations is the direct supervision of other employees and/or contract labor directly employed on the Subject Properties in a field operating capacity.

"Material" means personal property, equipment or supplies acquired or held for use on the Subject Properties.

"Operations" means all operations necessary for the development, operation, protection and maintenance of the Subject Properties.

"Operator" means COC.

"Personal Expenses" means travel and other reasonable reimbursable expenses of Operator's employees.

"Technical Employees" means those employees having special and specific engineering, geological or other professional skills and whose primary function in Operations is the handling of specific operating conditions and problems for the benefit of the Subject Properties.

(a)Direct Charges: The sum of:

Ecological and Environmental. Costs incurred for the benefit of the Subject Properties as a result of governmental or regulatory requirements to satisfy environmental considerations applicable to the Operations. Such costs may include surveys of an ecological or archaeological nature and pollution control procedures as required by applicable laws and regulations.

Rentals and Royalties. Lease rentals and royalties paid by Operator for the Operations.

Labor

1.   Salaries and wages of Operator's field employees directly employed on the Subject Properties in the conduct of Operations.

2.   Salaries of First Level Supervisors in the field.

Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's costs for the personnel set out above and which are chargeable to the parties to the applicable joint operating agreement related to the Subject Properties ("JOA").

Personal Expenses of those employees set out above whose salaries and wages are chargeable to the parties to the applicable JOA.

Employee Benefits. Operator's current costs or established plans for employees' group life insurance and hospitalization, for the employees set out above, applicable to Operator's labor cost chargeable to the parties to the applicable JOA, shall be Operator's actual cost.

Material. Material purchased or furnished by Operator for use on the Subject Properties. Only such Material shall be purchased for or transferred to the Subject Properties as may be required for immediate use and is reasonably practical and consistent with efficient and economical operations. The accumulation of surplus stocks shall be avoided.

Transportation. Transportation of employees and Material necessary for the Operations but subject to the following limitations:

A.   If Material is moved to the Subject Properties from the Operator's warehouse or other properties, no charge shall be made for a distance greater than the distance from the nearest reliable supply store where like material is normally available or railway receiving point nearest the Subject Properties unless agreed to by the Parties.

B.   If surplus Material is moved to Operator's warehouse or other storage point, no charge shall be made for a distance greater than the distance to the nearest reliable supply store where like material is normally available, or railway receiving point nearest the Subject Properties unless agreed to by the Parties. No charge shall be made for moving Material to other properties belonging to Operator, unless agreed to by the Parties.

C.   The option to equalize or charge actual trucking cost is available when the actual charge is $400 or less excluding accessorial charges. The $400 will be adjusted to the amount most recently recommended by the Council of Petroleum Accountants Societies.

Services. The cost of contract services, equipment and utilities provided by outside sources, except excluded services. The cost of professional consultant services and contract services of technical personnel directly engaged on for the benefit of the Subject Properties if such charges are excluded from the overhead rates.

Equipment and Facilities Furnished By Operator.

A.   Operator shall charge for the use of Operator-owned equipment and facilities at rates commensurate with costs of ownership and operation. Such rates shall include costs of maintenance, repairs, other operating expense, insurance, taxes, depreciation, and interest on gross investment less accumulated depreciation not to exceed twelve & one-half percent (12.5%) per annum. Such rates shall not exceed average commercial rates currently prevailing in the immediate area of the Joint Property. In no event shall the rates charged for Operator-owned equipment or facilities exceed the then-current fair market value of such equipment or facilities.

In lieu of charges above Operator may elect to use average commercial rates prevailing in the immediate area of the Subject Properties. For automotive equipment, Operator may elect to use rates published by the Petroleum Motor Transport Association.

other allocated and direct costs to the Subject Properties including but not limited:

1.   contract and professional services;

2.   materials, supplies, fuel, water, and treating chemicals;

3.   salt water disposal;

4.   all costs associated with processing, treating, compressing, marketing and transporting oil and natural gas produced from the Subject Properties.

5.   well and lease repairs and maintenance including workovers and pulling expense;

6.   transportation including boats, aircraft, and other vehicles;

7.   safety and environmental costs including spill cleanup;

8.   the costs of secondary recovery, pressure maintenance, repressuring, recycling, and other operations used to enhance production;

9.   insurance including workman's compensation, general liability, and the costs of certificates of responsibility, performance bonds or letters of credit;

10.   other miscellaneous costs of operating, producing, and maintaining the well furnished by Operator or on behalf of Operator; and

11.   costs incurred for claims, demands or litigation relating to property damage, including environmental damages, spills, clean-up and remediation, personal injury or death, or claims, demands or litigation brought by third parties, including governmental or regulatory authorities.

Damages and Losses to the Subject Properties. All costs or expenses necessary for the repair or replacement of the Subject Properties made necessary because of damages or losses incurred by fire, flood, storm, theft, accident, or other cause, except those resulting from Operator's gross negligence or willful misconduct. Operator shall furnish the Parties written notice of damages or losses incurred as soon as practicable after a report thereof has been received by Operator.

Legal Expense. Expense of handling, investigating and settling litigation or claims, discharging of liens, payment of judgments and amounts paid for settlement of claims incurred in or resulting from Operations under the JOA or necessary to protect or recover the Subject Properties.

Taxes. All taxes of every kind and nature assessed or levied upon or in connection with the Subject Properties, the Operations, or the production therefrom, and which taxes have been paid by the Operator..

Insurance. Net premiums paid for insurance required to be carried for the Operations for the protection of the Subject Properties. In the event Operations are conducted in a state in which Operator may act as self-insurer for worker's compensation and/or employers liability under the respective state's laws, Operator may, at its election, include the risk under its self-insurance program and in that event, Operator shall include a charge at Operator's cost not to exceed manual rates.

Communications. Cost of acquiring, leasing, installing, operating, repairing and maintaining communication systems, including radio and microwave facilities directly serving the Subject Properties. In the event communication facilities/systems serving the Subject Properties are Operator owned, charges shall be made as provided in Paragraph viii.

Other Expenditures. Any other expenditure not covered or dealt with in the foregoing provisions and which is of direct benefit to the Subject Properties and is incurred by the Operator in the necessary and proper conduct of the Operations.

(b)   Overhead

(i)   Overhead - Drilling and Producing Operations. As compensation for administrative, supervision, office services and warehousing costs, Operator shall charge drilling and producing operations on a Fixed Rate Basis, as set out in Paragraph (b)(iii)(A) below.

Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs and expenses of all offices and salaries or wages plus applicable burdens and expenses of all personnel, except those directly chargeable under Paragraph (a)(iii)A above. The cost and expense of services from outside sources in connection with matters of taxation, traffic, accounting or matters before or involving governmental agencies shall be considered as included in the overhead rates provided for in the Fixed Rate unless otherwise agreed to by the Parties in writing..

(ii)   The salaries, wages and Personal Expenses of Technical Employees and/or the cost of professional consultant services and contract services of technical personnel directly employed on the Subject Properties shall not be covered by the overhead rates.

(iii)   The salaries, wages and Personal Expenses of Technical Employees or other Operator personnel and/or costs of professional consultant services and contract services of technical personnel either temporarily or permanently assigned to and directly employed in the operation or for the benefit of the Subject Properties shall not be covered by the overhead rates.

A.   Overhead - Fixed Rate Basis

1.   Operator shall charge the following rates per well per month:

Drilling Well Rate $ [to be determined by JOA]

(Prorated for less than a full month)

Producing Well Rate $ [to be determined by JOA]

2.   Application of Overhead - Fixed Rate Basis shall be as follows:

i.   Drilling Well Rate

(a)   Charges for drilling wells shall begin on the date the well is spudded and terminate upon completion of the well except that no charge shall be made during suspension of drilling or completion operations for fifteen (15) or more consecutive calendar days.

(b)   Charges for wells undergoing any type of workover or recompletion for a period of five (5) consecutive work days or more shall be made at the drilling well rate. Such charges shall be applied for the period from date workover operations, with rig or other units used in workover, commence through date of rig or other unit release, except that no charge shall be made during suspension of operations for fifteen (15) or more consecutive calendar days.

ii.   Producing Well Rates

(a)   An active well either produced or injected into for any portion of the month shall be considered as a one-well charge for the entire month.

(b)   Each active completion in a multi-completed well in which production is not commingled down hole shall be considered as a one-well charge providing each completion is considered a separate well by the governing regulatory authority.

(c)   An inactive gas well shut in because of overproduction or failure of purchaser to take the production shall be considered as a one-well charge providing the gas well is directly connected to a permanent sales outlet.

(d)   A one-well charge shall be made for the month in which plugging and abandonment operations are completed on any well. This one-well charge shall be made whether or not the well has produced except when drilling well rate applies.

(e)   All other inactive wells (including but not limited to inactive wells covered by unit allowable, lease allowable, transferred allowable, etc.) shall not qualify for an overhead charge.

3.   The well rates shall be adjusted as of the first day of April each year following the effective date of the agreement to which this Exhibit is attached. The adjustment shall be computed by multiplying the rate currently in use by the percentage increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year compared to the calendar year preceding as shown by the index of average weekly earnings of Crude Petroleum and Gas Production Workers as published by the United States Department of Labor, Bureau of Labor Statistics. The adjusted rates shall be the rates currently in use, plus or minus the computed adjustment.

(a)   Where production costs incurred for the benefit of a Subject Property also benefit other wells or properties, COC will allocate charges on an equitable and consistent basis.

(b)   Production Costs for the Subject Properties shall not include:

(i)   amounts related to a Subject Properties which are applicable to operations prior to the Effective Date for such Subject Property;

(ii)   general and administrative costs that are not covered by the provisions of this Exhibit "B";

(iii)   depreciation, depletion, or amortization; and

(iv)   The value of any equipment removed from a Subject Property.

(c)Any increased costs or liabilities that are borne by COC as a result of its being a consenting party in non-consent operations on a Subject Property shall be deemed to be allocable to or applicable to such Subject Property.

EXHIBIT C

Financial Accounting Procedure

The purpose of this Accounting Procedure is to establish equitable methods for determining financial information applicable to the Parties under the Agreement and to ensure the necessary and appropriate exchange of data by and between the Parties.

1. Accounting Reporting

For so long as Domain may be entitled to receive any NPI Payment hereunder, COC shall provide to such Provider, on or before the last day of each Month, the information contained within the monthly joint interest billing report (“JIB”) generated by COC and provided to each working interest owner for the Contract Area (or the equivalent information contained in any successor document) for the immediately preceding Month including, but not limited to, Hydrocarbon Production, total revenues attributable to such Hydrocarbon Production, royalty and overriding royalty payments and severance taxes. COC shall also provide to Domain total well completion and construction costs on an ongoing basis, as appropriate.

2. Accounting Adjustments

In the event that the data provided by the Parties pursuant to Article 1 above requires any adjustment to accurately reflect the Party’s respective costs incurred for the Subject Properties, such Party shall promptly notify the other of such adjustment and provide revised information. The Parties shall make every reasonable effort to minimize the adjustments made to data previously provided to each other and to ensure the accuracy of such data within three (3) months of initially reporting such data.

3. Domain Payments

NPI Payments earned by Domain under the terms of this Agreement shall be paid in accordance with the provisions of Article 4 and shall be paid to Domain in accordance with the following wire instructions:

Domain

4 Audit Rights

Domain shall have the continuing right and option to audit the books and records of COC covering the Contract Area after reasonable request therefore for two (2) years following the end of any Month during which Domain reasonably believes it would be entitled to receive a NPI Payment from COC. Domain shall be responsible for the full cost of the audit. The initial audit, should Domain elect to conduct such an audit, shall be conducted no sooner than one (1) year after the Effective Date of this Agreement.

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EXHIBIT D

Form of Assignment of Net Profits Interest

EXHIBIT E

MORTGAGE, ASSIGNMENT OF

PRODUCTION AND SECURITY AGREEMENT

Date:

Grantor:

(List Owners) (the “Owners”), acting through their duly authorized agent for such purpose, COC.

Grantor's Mailing Address (including county):

Grantee:

Domain Development Partners I, LP

Grantee's Mailing Address (including county):

10000 Memorial Drive

Suite 550

Houston, Tx 77024

Secured Obligations:

COC’s obligation to make NPI and Finance Payments to Grantee under that certain Funding Agreement dated [_______________________] (as from time to time amended, modified or restated, the “Agreement”), by and between COC and Grantee and becoming due prior to abandonment of the Property.

Property:

All of Grantor's right, title and interest, now owned or hereafter acquired, in and to the following:

1.   the _________ [describe well] (the "Well") and the wellbore of the Well;

2.   the lands described (which term shall include any lands the description of which is incorporated therein by reference to another document) on Exhibit A attached hereto and hereby made a part hereof, and all lands now or hereafter unitized or pooled with any lands described in Exhibit A (collectively, the "Lands"), but insofar and only insofar as the Lands are necessary to reasonably operate, maintain and produce, receive, sell or otherwise dispose of all oil, gas or other hydrocarbons produced through the wellbore of the Well;

41

3. the oil and gas leases, oil, gas and mineral leases, fee interests, mineral interests, working interests, overriding royalty interests, royalty interests and other interests described in Exhibit A or covering or relating to any of the Lands or any of the same as they may be enlarged by the discharge of any payments out of production or by the removal of any charges or encumbrances to which any of the same are subject (collectively, the “Interests”) but insofar and only insofar as the Interests are necessary to reasonably operate, maintain and produce, receive, sell or otherwise dispose of all oil, gas or other hydrocarbons produced through the wellbore of the Well;

4. all operating, unitization and pooling agreements and orders now or hereafter existing and the properties covered and the units created thereby (including all units formed under acts of any governmental agency) which are described on Exhibit A or cover or relate to any of properties, rights and interests described in clauses 1, 2 or 3 above;

5. all oil, gas, casinghead gas and other liquid or gaseous hydrocarbons (collectively, "Hydrocarbons") which are in, under, upon, produced or to be produced from the Lands;

6. all contracts for the sale, purchase, transportation, exchange or processing of Hydrocarbons produced from the Lands or the Interests;

7. all subleases, farmout agreements, assignments of interest, assignments of operating rights, contracts, operating agreements, rights-of-way, franchises, privileges, permits, licenses, easements, tenements, hereditaments, appurtenances and benefits now existing or in the future obtained and incident and appurtenant to any of the foregoing;

8. all lease records, well records and production records which relate to any of the foregoing;

9. all of the personal property (surface and subsurface) now or hereafter located on or under any of the Lands; and

10. all proceeds and products from any of the foregoing, including, but not limited to, accounts, contract rights and general intangibles.

Prior Liens (including recording information):

[Insert, if any]

Other Exceptions to Conveyance and Warranty:

[Insert, if any]

For value received and to secure payment and performance of the Secured Obligations, Grantor does hereby MORTGAGE the Property to Grantee and grants to Grantee a POWER OF SALE (pursuant to this Mortgage and applicable law). Grantor agrees to defend title to the Property against the claims and demands of all persons claiming the same or any part thereof, through or under the Grantor, but not otherwise. If Grantor pays and performs all of the Secured Obligations and its obligations hereunder, this Mortgage, Assignment of Production and Security Agreement (this “Mortgage”) shall have no further effect, and Grantee shall promptly release it at Grantees’ sole expense.

Grantor's Obligations:

Grantor agrees to:

1.keep the Property in good repair and condition;

2.pay all taxes and assessments on the Property when due;

3.preserve the lien's priority as it is established in this Mortgage;

4.observe and comply with all of the terms and provisions of all oil, gas and mineral leases and other agreements relating to the Property;

5.develop and operate the Property in accordance with sound field practices, applicable operating agreements and all applicable legal requirements; and

6.if this is not a first lien, pay all prior lien notes and abide by all prior lien instruments.

Grantee's Rights:

1.   If Grantor fails to perform any of Grantor's obligations, Grantee may perform those obligations and be reimbursed by Grantor on demand at the place where the Secured Obligations are payable for any sums so paid, including attorney's fees, plus interest on those sums from the dates of payment at the rate stated in the Contract for unpaid, past due amounts. The sum to be reimbursed shall be secured by this Mortgage.

2. If Grantor defaults on the Secured Obligations or fails to perform any of Grantor's obligations or if default occurs on a prior lien note or other instrument, and the default continues after Grantee gives Grantor thirty (30) days written notice of the default and a thirty (30) day opportunity to cure, as may be required by law or by written agreement, then Grantee may:

a.   declare the unpaid principal balance and earned interest on the Secured Obligations immediately due;

b.   foreclose this lien on the Property, or any part thereof, in any manner permitted by applicable law;

c.   exercise its rights of enforcement with respect to the personal property under the Uniform Commercial Code or any other statute in force in any state to the extent the same is applicable law; and

d.   purchase the Property at any foreclosure sale by offering the highest bid and then have the bid credited against the Secured Obligations.

Cumulative of the foregoing and the other provisions of this Mortgage:

A POWER OF SALE HAS BEEN GRANTED IN THIS MORTGAGE. A POWER OF SALE MAY ALLOW GRANTEE TO TAKE THE PROPERTY AND SELL IT WITHOUT GOING TO COURT IF A FORECLOSURE ACTION UPON DEFAULT BY GRANTEE UNDER THIS MORTGAGE.

Assignment of Production:

Independent but cumulative of any and all other rights and remedies created by this Mortgage, Grantor assigns to Grantee:

1.   all Hydrocarbons and other minerals, and the proceeds therefrom, produced and to be produced from the Property from and after 7:00 a.m., local time, on the first day of the first calendar month to begin after the date of this Mortgage;

2.   all accounts and general intangibles and all proceeds payable to or to become payable to Grantor or to which Grantor is or becomes entitled under all gas sales contracts, all oil, distillate or condensate sales contracts, all gas transportation contracts and all gas processing contracts, present and future, relating to, or now or hereafter to become a part of, the Property; and

3.   all amounts payable to or to become payable to Grantor from any part of the Property or under any contract, present or future, relating to any gas pipeline system or processing plant or unit now or hereafter constituting part of the Property.

Grantor authorizes and directs all parties purchasing or receiving Hydrocarbons from the Property or having in their possession any such production or the proceeds therefrom to pay and deliver the same to Grantee. Grantor authorizes Grantee to demand, receive and hold all of the foregoing and to execute and deliver, in the name of Grantor or of Grantee, any release, receipt, division order, payment order, transfer order, relinquishment or other instrument that may be necessary or advisable to collect and receive such production or the proceeds therefrom. No party making payment shall have any responsibility to see to the application of any funds paid to Grantee, but any such party shall be fully protected in making such payment to Grantee under this assignment. Should Grantee bring suit against any third party for collection of any amounts included within this assignment (and Grantee shall have the right to bring any such suit), it may sue in the name of Grantor or of Grantee. Grantee is absolved from all liability for failure to enforce collection of the proceeds of production and from all other responsibility in connection with this assignment, except the responsibility to account to Grantor for funds actually received.

Security Agreement:

In addition to creating a mortgage lien on all the real and other property described above, Grantor also grants to Grantee a security interest in all Property other than the realty pursuant to the Texas Uniform Commercial Code. In the event of a foreclosure sale under this Mortgage, Grantor agrees that all the Property may be sold as a whole at Grantee's option and that the Property need not be present at the place of sale.

Grantee’s Interest:

Notwithstanding anything to the contrary contained herein, Grantee agrees that in the event of any foreclosure or other exercise of remedies provided herein (a) Grantee is entitled to receive an amount equal to (i) seventy five percent (75%) of Grantor’s Net Profits until Payout and (ii) twenty five percent (25%) of Grantor’s Net Profits after Payout and up to two hundred percent (200%) (collectively “Grantee’s Interest”) and (b) Grantee will promptly reconvey to Grantor all Property other than the Grantee’s Interest that was subject to such sale or other exercise of remedies. As use in this section, the terms “Net Profits”, “Provider’s Percentage” and “Payout” shall have the meaning assigned to them in the Contract.

General Provisions:

1. Recitals in any deed conveying the Property after a foreclosure sale will be presumed to be true.

2. Proceeding under this Mortgage, filing suit for foreclosure, or pursuing any other remedy will not constitute an election of remedies.

3. This lien shall remain superior to liens later created even if the time of payment of all or part of the Secured Obligations is extended or part of the Property is released.

4. If any portion of the Secured Obligations cannot be lawfully secured by this Mortgage, payments shall be applied first to discharge that portion.

5. Grantor assigns to Grantee all sums payable to or received by Grantor from condemnation of all or part of the Property, from private sale in lieu of condemnation, and from damages caused by public works or construction on or near the Property. After deducting any expenses incurred, including attorney's fees, Grantee may release any remaining sums to Grantor or apply such sums to reduce the Secured Obligations. Grantee shall not be liable for failure to collect or to exercise diligence in collecting any such sums.

6. Interest on the debt secured by this Mortgage shall not exceed the maximum amount of nonusurious interest that may be contracted for, taken, reserved, charged, or received under law; any interest in excess of that maximum amount shall be credited on the principal of the debt or, if that has been paid, refunded. On any acceleration or required or permitted prepayment, any such excess shall be canceled automatically as of the acceleration or prepayment or, if already paid, credited on the principal of the debt or, if the principal of the debt has been paid, refunded. This provision overrides other provisions in this and all other instruments concerning the debt.

8. When the context requires, singular nouns and pronouns include the plural.

9. The term“Secured Obligations”includes all sums secured by this Mortgage.

10. This Mortgage shall bind, inure to the benefit of, and be exercised by successors in interest of all parties.

11. This Mortgage covers goods which are or are to become fixtures on the real property described therein, and this Mortgage shall be effective as a financing statement filed as a fixture filing with respect to all fixtures included within the Property.

Grantor:
[list Owners]
By:
	COC

By:  

Name:

Title:

THE STATE OF TEXAS§

§

This instrument was acknowledged before me on ____________________ ____, 20___, by ___________________________, __________________________________ of COC, a ______ corporation, on behalf of said corporation.

NOTARY STAMP BELOW:

Notary Public in and for the State of Texas

 My commission expires:  

EX-10.18

  
    
      Unassociated Document





  
    

EX-10.19

Exhibit 10.19

INDEMNIFICATION AGREEMENT

GRAVES OIL & BUTANE CO. (GOBCO) OPERATIONS AND PROPERTIES

As agreed to within the PDSA, and as previously acknowledged in the SDRA and the FASDRA, the "Obligors" to the PDSA, Capco Energy (as limited below), Meteor Marketing, Meteor Enterprises, Graves Oil & Butane, Sedco, and Ilyas Chaudhary personally, with total and combined authority for Ilyas Chaudhary to execute this agreement on behalf of all named parties above, for themselves and their respective successors and assigns, hereby agree to indemnify, defend and hold harmless GFILP and the Estate and their respective heirs, successors, assigns, agents, representatives, and attorneys from all claims, demands, damages, consequential damages, punitive damages, contracts, breach of warranties, liabilities, alleged violations of Environmental Laws, injuries to persons or bordering properties or both, actions and causes of action of every kind or nature, both known and unknown, including any encroachment, survey or boundary dispute, arising from or as connected to any GOBCO properties or any Environmental Condition resulting from or relating to the operations of GOBCO or any assets, leases, or properties formerly or presently owned or operated by GOBCO. This Agreement supercedes and replaces Paragraph 5.E. of the SDRA. Capco Energy is limited to $250,000 cumulative obligation for any and all claims, penalties, or obligations under this Indemnification Agreement and previous environmental indemnification obligations.

It is the obligation of the Obligors to defend and provide indemnification hereunder, and shall expire on the latter of the following events: on October 21, 2011. or until the final resolution of all known, pending, or threatened Environmental Condition or other disputed conditions or actions as recited in this Agreement relating to GOBCO and or the Secured properties which may arise or that are of record either before or prior to October 21,2011. Any GOBCO or third party site that has been mentioned or mapped for either suspect risk or actual environmental activity in any past or future environmental reports generated for GOBCO since the year of 2000 through the date of October 21,2011 without release, cure, or NFA or any she that has received a notice or demand from an Environmental Agency or a third party for investigation, clean up or other dispute shall be subject to the obligor's continuing indemnification until a closure or release letter from the appropriate party or agency has been received.

The continued obligations shall continue on all such sites after October 21, 2011 until a closure letter from State agency is received. With respect to sites on which there is a continuing obligation, the obligation shall provide indemnification for claims from the State agency and for any other claims related to the property, including claims from adjacent third parties.

The Obligors further agree to provide the GFILP during the effective period of this Agreement: a) any material reports, notices, actions, disputes, Environmental findings of any type relating to the GOBCO or the Secured Properties This does not include regular ongoing communications between GOBCO and the Petroleum Storage Bank Bureau of New Mexico or similar agency in Colorado on sites that have ongoing work as of December 20,2005; b) Documentation from any applicable federal, state, or local governmental office or agency, that any Environmental Condition relating to GOBCO or any Secured Property has been resolved and closed with no further action required. The Obligors will provide the foregoing reports or documents to the GFILP within thirty (30) days of receipt or creation of the referenced documents.

Failure of the Obligors to perform on any terms of this Agreement, either by refusal to act within sixty (60) days written notice from the GFILP on any proved event that the Obligors indemnity covers, or by failure of the Obligors to act upon any government office or agency demand or notice by sixty (60) days, will cause a penalty of $50.000 due from the Obligors directly to the GFILP. Said penalty will serve of no credit to any action, fine or costs to this Agreement, only for the benefit of the GFILP- Said penalty does not relieve Obligors of any obligations under this Agreement. Default of The Obligors to make said payment within thirty (30) days of written demand by the GFILP, will cause the penalty payment to become a judgment against the Obligors in favor of the GFILP with interest accruing at eight percent (8%) from the date of notice.

This agreement is subject to Binding Arbitration (3 member panel) within 30 days of any incurred default to this Agreement by the Obligors or any incurred dispute between the parties which terminates the indemnity. The judgment of the Arbitration will be final and without appeal.

AGREED AND ACCEPTED BY-ILYAS CHAUDHARY,

Individual^

__________________________________

Signature

Printed Name: __________________________

AGREED AND ACCEPTED BY: CAPCO ENERGY

Printed Name:

Title: ___________________________

EX-10.20

Exhibit 10.20

POST-DEFAULT SETTLEMENT AGREEMENT

FORBEARANCE AGREEMENT TO POA

This forbearance agreement, otherwise referred to as the Post Default Settlement Agreement ("PDSA") is entered into this _ day of October., 2005 by and between Meteor Energy. Inc., Graves Oil & Butane Co., Inc. ("GOBCO"), Sedco, Inc. ("Sedco"). Capco Energy, Inc., Meteor Enterprises, Inc., Meteor Marketing., Inc.. Ilyas Chaudhary (sometimes collectedly referred to as "Obligors"), and Graves Family Investments Limited Partnership ("GFILF^"), and the Estate of Theron J. Graves ("Estate"). All parties referenced above collectively referred to as the "Parties".

The Parties stipulate as follows:

A. The Parties entered into that certain Pay-Off Agreement ("POA") on or about December 20, 2004.

B. The POA amended, in-part, prior agreements between the various parties identified above, including, the Settlement and Debt Restructuring Agreement dated August 9, 2000 ("SDRA"}, and the First Amendment to the Settlement: and Debt Restructuring Agreement dated October 23, 2001 ("FASDRA "). both attached as Exhibits to the POA,

C. Sedco, as Payer under the POA, acknowledges its breach, and default under the terms of the POA to complete the final payment due there under.

D. Under the POA, Sedco is justly indebted to GFILP, in. an amount of no less than $3,896,701 .00 which includes, but is not limited to outstanding principal, past due payments, penalties and interest and other consideration due as of December 15. 2004. Said value represents the combined amounts owing from four promissory notes issued by GOB CO and payable to GFILP under the SDRA and as amended by the FASDRA and the POA. The total amount owing under the POA shall be referred to as the "Indebtedness."

E. GFILP provided sufficient and proper notice to Sedco/Obligors that all amounts owing under the POA were accelerated and then due and payable.

F. The Indebtedness, inclusive of all past penalties and interest, collection and legal costs in favor of GFILP, is folly enforceable and is not subject to any defense, counterclaim, or any claim of setoff or recoupment.

G. In prior transactions and agreements between the Parties, Obligors have, individually and collectively, guaranteed the payment of tike Indebtedness. Obligors have also previously executed promissory notes, mortgages, guaranties, security agreements and other liens in favor of GFILP relating to various properties, equipment, other assets and promises to pay ("Security Interests"). Due to Sedco's default under the POA, all of GFILP's Security Interests remain in full effect valid and enforceable by GFILP and the Estate, subject to the terms of this PDSA.

H. Sedco represents that, because of its financial condition; at this time it is unable to pay the full amount of the indebtedness. The Parties are entering into this PDSA because of Sedco's representations and warranties concerning its current financial condition and ability to pay a reduced amount

I. The POA shall be modified to the extent that GFILP_> as Payee under toe POA, agrees to a discounted pay-off amount under the POA subject to the terms and conditions provided below. The discounted pay-off amount under this PDSA shall be $2,620,000,00, so long as Sedco complies with the terms of this PDSA. The discounted amount consists of GFILP's forgiveness of $571,701.00 in accumulated interest plus an. additional credit of $705,000.00 consisting of tine following prior transactions between the Parties and corresponding amounts;

Mancini Payment	$	100,000,00
2 Lubricar Note credits	$	350,000.00
Lubricar Cash credit	$	10,000.00
Payment made under POA 2.B.	$	50,000.00
Payment made under POA 2.C.	$	50,000.00
Southern & Golf payment	$	95,000.00
5 payments of $10,000.00	$	50,000.00

J. Sedco has deposited Two Hundred Thousand Dollars ($200,000.00) of good fluids ("Deposited Funds") in the trust account of its legal counsel, Domenici Law Firm., P.C., as consideration to induce GFI

K. LP to enter into this PDSA.

K. As part of the POA, Obligors deposited approximately 10,000,000 common shares of Capco Energy, Inc., into the trust account of Domenici Law Firm, P.C. These shares shall remain in the custody of Domenici Law Firm, P.C., subject to the terms of this PDSA.

L. The Parties shall immediately engage New Mexico Title Company of Farmington, New Mexico (c/o Jamie Bond) to act as the escrow agent ("Escrow Agent"') for all acts necessary to consummate the terns of this PDSA.

M. GFILP shall prepare and execute appropriate releases ("Releases") of all its Security Interests payment guaranties previously executed in its favor by any of the Obligors and deliver the Releases to Escrow Agent no later than October 17,2005. Copies of the Releases shall be simultaneously delivered to die Domenici Law Firm. P.C.

N. Upon receipt of the Releases, Escrow Agent shall notify the Domenici Law Firm by faxed letter (at 505-884-3424) or email transmission at i>doinenici@.dom&rucilaw.com that the Releases have been received in escrow.

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

1, Forbearance Period

Subject to The express provisions of this PDSA, GFILP hereby agrees to forbear from exercising its rights and remedies related to the Indebtedness under the POA until the earlier of (i) November 22, 2005, or (ii) the occurrence of a Termination Event, as defined below. This period of forbearance is hereinafter referred to as the- Forbearance Period.

2-. Conditions of Forbearance.

GFILP's agreement to forbear is conditioned upon and subject to timely satisfaction of each of the following conditions ("Conditions of Forbearance").

a.The Domenici Law Firm's receipt of notice from Escrow Agent that the Releases have been received in escrow shall act as Sedco/Obligors' instruction, to the Domenici Law Firm to wire transfer the Deposited Fluids to Escrow Agent payable to GFILP. The wire transfer of the Deposited Funds shall occur no later than October 2i, 2005.

b.Sedco/Obligors shall wire transfer an additional amount of Two Million Four Hundred Twenty Thousand Dollars ($2,420,000.00) to Escrow Agent, payable to GF1LP, no later than 5:00 P.M. MST on November 21,2005-

c.All representations and warranties made by Obligors to GFILP under this Agreement shall remain true and correct throughout the Forbearance Period.

d.During the Forbearance Period, Obligors' obligation to make payments to GFILP shall be governed by this PDSA

e.During the Forbearance Period, Obligors shall not breach any promise or covenant contained in this PDSA a»d promise not to be in default under any provision of This PDSA.

3. Termination Events

The following shall constitute a Termination Event and an Event of Default under this Agreement;

Obligors fail to comply m a timely manner with arty of the Conditions of Forbearance set forth, above.

4, Termination of Forbearance Period.

The Parties agree that the Forbearance Period automatically, and without notice, shall be terminated upon the earlier of:

(a)   November 22, 2005, or

(b)   The occurrence of any Termination Event, as defined above.

Upon termination of the Forbearance Period, the entire amount of the Indebtedness, plus any additional past-due penalties and interest accumulated under the SDRA and/or FASDRA, shall be immediately due and payable, and GFILP shall be under no obligation to forbear in any respect and shall be entitled immediately to exercise all of its rights and remedies \under this PDSA, the PDA, and any surviving provisions of the SDRA and/or FASDRA, promissory notes, mortgages,, security agreements and associated guaranties relating to any of its Security Interests, all without further notice to Obligors.

(i) GFILP agrees to extend the termination of the Forbearance Period to December 20, 2005 upon receipt of wired funds from Obligors payable to GFILP in the amount of Twenty Five Thousand Dollars (525,000.110) no later than November 21,2005. This payment, if made, shall act only to extend the termination of the Forbearance Period and shall riot reduce or offset the amount of the Indebtedness or discounted pay-off amount, or modify any other provision of this PDSA.

5. Forgiveness of Indebtedness

(a) Provided that throughout the Forbearance Period, Obligors satisfy ail of the Conditions of Forbearance set forth above and timely pays the entire amounts contemplated herein, then:

(i) at the conclusion of the Forbearance Period, Escrow Agent shall release all funds deposited into escrow by Sedco/Obligors to GFILP;

(ii) GFILP wili discharge arid release the then remaining outstanding balance of the Indebtedness according to the terms of the POA and this PDSA;

(iii) GFILP shall instruct the Escrow Agent to record all Releases and deliver the recorded originals to the Domenici Law Firm with copies to the McAlester Law Firm; and.

     (iv) GFILP shall provide written notice to Obligors that all shares of Capco Energy, Inc., may be released back to the appropriate Obligors.

(b). If, however, there shall ever occur a Termination Event, then:

(i) GFILP shall be under no obligation to forgive or discharge any portion of the Indebtedness, including but not limited to the 5705,000-00 credit referenced in paragraph I above, which Obligors agree shall be considered liquidated damages in favor of GFILP for Obligors' failure to comply with the Conditions of Forbearance and shall not be recognized, as a credit to or reduction of the Indebtedness;

(ii) Escrow Agent, or Domenici Law Finn* P.C., whomever is the applicable custodian of the Deposited Funds at the time, stall immediately release to GFILP the entire amount of Deposited Funds which shall be forfeited by Sedco/Obligors as non-refundable and liquidated damages in favor of GFILP for failure to comply with the Conditions of Forbearance and shall not be recognized as a credit to or reduction of the Indebtedness; and,

(iii) Domenici Law Finn, P.C,, shall immediately release to GFILP the 10,000,000 shares of Capco Energy, Inc. then held in its trust account without need for prior approval from any of the Obligors and according to the terms of the POA,

6.Effectiveness of POA, FASDRA and Underlying Agreements

This Agreement shall not constitute a novation of any promissory note or promise to pay arising under the POA or FASDRA, or invalidation of any other mortgage, guaranty, financing statement, security interest, or environmental indemnification arising there from, and the promissory notes shall remain in full force and effect subject only to GFILP's agreement to forbear as set forth here in

7.Release and Waiver

Upon completion of the payment obligations set forth in 5.(a) above, Obligors hereby acknowledge and stipulate that they have no claims or causes of action against GFILP of any kind whatsoever. Likewise, Obligors hereby release GFILP from any and ail claims, causes of action, demands and liabilities of any kind whatsoever whether direct or indirect, fixed or contingent, liquidated or non-liquidated, disputed or undisputed, known or unknown, which Obligors have or may acquire in the future relating in any way to any event, circumstance, action or failure to act from the execution of the SDRA to the date of this Agreement.

8.No Waiver by GFILP

This Agreement shall not constitute a waiver by GFILP of any of Obligors' defaults under any promissory note or the POA or FASDRA. Except as expressly provided herein, GFILP reserves all of its rights and remedies under the POA and FASDRA and all applicable promissory notes, guaranties, mortgages and security agreements. Upon, completion of the payment obligations set forth, in 5 .(a) above, this paragraph shall become void,

9. Additional Warranties arid Representations by the parties

(a)No later than October 21,2005, Obligors shall provide GFILP and Estate _a separately executed acknowledgment of their indemnification in favor of GFILP and Estate as provided for in the SDRA and FASDRA as it pertains to any secured property for any dispute, claim or action on any disclosure or statement made as to the environmental conditioning or any other condition affecting the properties or use of the properties. The acknowledgment shall be, in a form acceptable to GFILP. Obligors' future failure to defend the indemnification or hold harmless in favor of GFILP and Estate. will cause a penalty of $50,000.00 to be entered in favor of GFILP or Estate in addition to any other judgment entered against Obligors arising from their failure to defend or hold harmless.

(b)Obligors promise that with any future initial sale of GOB CO assets, the initial purchasers will be required to execute a waiver, in a form agreed to as attached hereto, of any rights or claims against GFILP and Estate of Theron Graves as part of the closing documents. Copies of all waivers will be forwarded to the McAllister Law Firm prior to any closing. An initial sale shall be the first sale of any specific asset to any entity or person in which any Obligor has no ownership interest or family relation. An initial purchaser shall be any entity or person in which any Obligor has no ownership interest, or family relation.

(c)To the extent needed in the discretion of Obligors, GFILP agrees to reasonably cooperate in the closing of any future GOBCO asset sale that requires the GFILP's involvement.

(d)The Parties shall pay equally all escrow and recording fees arising from the acts or requirements of this PDSA.

(e)The Parties agree that Escrow Agent shall have absolute and final discretion to determine -whether any act, omission to act. or event contemplated herein has occurred according to the terms of this PDSA. The Parties agree to hold Escrow Agent harmless for its decisions and determinations with respect to its interpretation of the PDSA.

10. Governing Law and Arbitration

The law of the State of New Mexico shall govern this agreement. Any controversy or claim arising out of or related to this PDSA, or the breach thereof shall 'be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators) may be entered in any court having jurisdiction thereof. Any arbitration hearings shall be held in. Albuquerque, Haw Mexico within 60 days of the termination of the forbearance Period.

11.Attorneys Fees.

In the event litigation or arbitration proceedings relating to this Agreement, the party prevailing in any such action 01 other proceeding shall be paid all reasonable attorney's .fees, costs and expenses by the- other party.

12.Amendments.

This Agreement cannot be amended, rescinded, supplemented or modified except in writing signed by the parties hereto.

13.Miscellaneous

(a)The parties agree to execute any further documents and do all other acts necessary or appropriate to complete this transaction, including without limitation transfer of titles to equipment if required

(b)No waiver of any of the provisions of this Agreement shall be deemed or shall constitute & waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

(c)This Agreement may be executed in one or more counterparts, each of which shall be regarded as an original and all of which shall constitute but one and the same instrument.

(d)If any provision of this Agreement is determined by a court to be invalid or unenforceable, such determination shall not affect any of the other provisions, each of which shall be construed and enforced as if such invalid or unenforceable provision -were not contained herein.

(e)This Agreement shall be binding upon and inure to the benefit of the successors and assignees of the parties hereto. No other person shall have any right, benefit or obligation hereunder.

(f)All representations and warranties contained in this Agreement, and any of the other closing documents, shall survive closing.

AGREED AND ACCEPTED BY:

METEOR ENERGY, INC/CAPCO ENERGY, INC.

Signature

Printed Name:

AGREED AND ACCEPTED BY;

SEDCO, INC.

Signature   Printed

Name

AGREED AND ACCEPTED BY;

ILYAS CHAUDHARY, Individually

Printed Name:

AGREED AND ACCEPTED BY:

GRAVES OIL & BUTANE CO, INC.

Signature ___________________________

Printed Name: .. A—.

AGREED AND ACCEPTED BY;

METEOR MARKETING, INC

Signature

Printed Name:

AGREED AND ACCEPTED BY:

METEOR ENTERPRISES, INC.

Signature

Printed.

AGREED AND ACCEPTED BY: GRAVES FAMILY INVESTMENTS

ESTATE' OF THERON J. GRAVES

EX-21

Exhibit 21

SUBSIDIARIES OF REGISTRANT

NAME (AND % OWNED)	JURISDICTION OF INCORPORATION OR ORGANIZATION	OTHER NAMES UNDER WHICH SUBSIDIARY DOESBUSINESS
Capco Asset Management, Inc.	Nevada	None
(100% owned by Capco Energy, Inc.)
Capco Offshore, Inc.	Texas	None
(100% owned by Capco Energy, Inc.)
Packard Gas Company	Texas	None
(100% owned by Capco Energy, Inc.)
Capco Operating Company	Texas	None
(100% owned by Capco Energy, Inc.)
Capco Marine LLC	Texas	None
(100% owned by Capco Offshore, Inc.)
Solano Well Service LLC	Texas	None
(100% owned by Packard Gas Company)

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We hereby consent to the incorporation of our report, dual dated April 1, 2005 and July 19, 2006 as to the effects of the reclassification as disclosed in Note 1, included in this Form 10-KSB in the previously filed Registration Statements of Capco Energy, Inc. and subsidiaries on Forms S-8 (File No. 333-112693, effective February 11, 2004, File No. 333-118173, effective August 12, 2004, and File No. 333-122889, effective February 17, 2005).

/s/ Stonefield Josephson, Inc.

Stonefield Josephson, Inc.

Irvine, California

August 11, 2006

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Ilyas Chaudhary, the Chief Executive Officer of Capco Energy, Inc., certify that:

1. I have reviewed this Form 10-KSB for the fiscal year ended December 31, 2005, of Capco Energy, Inc.;

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 small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me 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 small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting.

Date: August 11 , 2006

/s/ Ilyas Chaudhary

Ilyas Chaudhary

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Mansoor Anjum, the Chief Financial Officer of Capco Energy, Inc., certify that:

1. I have reviewed this Form 10-KSB for the fiscal year ended December 31, 2005, of Capco Energy, Inc.;

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 small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to me 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 small business issuer'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 small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and

5. The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer'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 small business issuer'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 small business issuer's internal control over financial reporting.

Date: August 11 , 2006

/s/ Mansoor Anjum

Mansoor Anjum

Chief Financial Officer

EX-32.1(A)

EXHIBIT 32.1 (a)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C.SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Annual Report of Capco Energy, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ilyas Chaudhary, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(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 result of operations of the Company at the dates and for the periods indicated.

/s/ Ilyas Chaudhary

Ilyas Chaudhary

Chief Executive Officer

August 11, 2006

EX-32.1(B)

EXHIBIT 32.1 (b)

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C.SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Annual Report of Capco Energy, Inc. (the "Company") on Form 10-KSB for the fiscal year ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mansoor Anjum, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(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 result of operations of the Company at the dates and for the periods indicated.

/s/ Mansoor Anjum

Mansoor Anjum

Chief Financial Officer

August 11, 2006