10-K

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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

[ x ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934
                  For the fiscal year ended December 31, 2002
                                       or
[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934.

                        Commission file number 001-31539

                     ST. MARY LAND & EXPLORATION COMPANY
             (Exact name of registrant as specified in its charter)

            Delaware                                     41-0518430
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

             1776 Lincoln Street, Suite 700, Denver, Colorado 80203
             ------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (303) 861-8140
              (Registrant's telephone number, including area code)

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

        Title of each class                          Name of each exchange
                                                      on which registered

    Common Stock, $.01 par value                    New York Stock Exchange
    ----------------------------                    -----------------------

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [ x ] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K 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-K or any amendment to this
Form 10-K. [ ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12-6-2 of the Act). Yes [ x ] No [ ]

The  aggregate  market  value of  27,152,051  shares  of  voting  stock  held by
non-affiliates  of the  registrant,  based  upon the  closing  sale price of the
common stock on June 28, 2002,  the last business day of the  registrant's  most
recently completed second fiscal quarter, of $24.06 per share as reported on the
Nasdaq  National  Market System,  on which St. Mary's common stock was traded at
the time,  was  $653,278,347.  Shares of common stock held by each  director and
executive  officer  and by each  person who owns 10% or more of the  outstanding
common  stock or who is  otherwise  believed  by the  Company to be in a control
position  have been  excluded.  This  determination  of affiliate  status is not
necessarily a conclusive determination for other purposes.

          As of  March 3, 2003, the  registrant had 31,433,900 shares  of common
stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

The information  required by Items 10, 11, 12 and 13 of Part III is incorporated
by  reference  from  portions of the  registrant's  definitive  proxy  statement
relating to its 2003 annual meeting of  stockholders to be filed within 120 days
from December 31, 2002.

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                                TABLE OF CONTENTS
                                -----------------

ITEM                                                                        PAGE
- ----                                                                        ----
                                     PART I

ITEM 1.   BUSINESS.............................................................1
              Background.......................................................1
              Business Strategy................................................2
              Significant Developments Since December 31, 2001.................3
              Major Customers..................................................4
              Employees and Office Space.......................................5
              Title to Properties..............................................5
              Competition......................................................5
              Government Regulations...........................................5
              Risk Factors....................................................10
              Cautionary Statement about Forward-Looking Statements...........20
              Available Information...........................................21
              Glossary........................................................21

ITEM 2.   PROPERTIES..........................................................23
              Operations......................................................23
              Acquisitions....................................................28
              Reserves........................................................28
              Production......................................................29
              Productive Wells................................................30
              Drilling Activity...............................................30
              Acreage.........................................................31

ITEM 3.   LEGAL PROCEEDINGS...................................................32

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................32

ITEM 4A.  EXECUTIVE OFFICERS OF THE REGISTRANT................................33

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND
          RELATED STOCKHOLDER MATTERS.........................................34

ITEM 6.   SELECTED FINANCIAL DATA.............................................36


                                   i


                                TABLE OF CONTENTS
                                -----------------
                                   (Continued)
ITEM                                                                        PAGE
- ----                                                                        ----

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS.................................38
              Overview........................................................38
              Critical Accounting Policies and Estimates......................38
              Results of Operations...........................................41
              Liquidity and Capital Resources.................................46
              Accounting Matters..............................................53
              Effects of Inflation and Changing Prices........................54
              Environmental...................................................55

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
          MARKET RISK.........................................................55

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................56

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURE.................................56

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................56

ITEM 11.  EXECUTIVE COMPENSATION..............................................57

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
          AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................57

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................57

ITEM 14.  CONTROLS AND PROCEDURES.............................................57

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
          REPORTS ON FORM 8-K.................................................58


                                       ii


                                     PART I

When we use the terms "St. Mary," "we," "us" or "our," we are referring to St.
Mary Land & Exploration Company and its subsidiaries, unless the context
otherwise requires. We have included technical terms important to an
understanding of our business under "Glossary". Throughout this document we make
statements that are classified as "forward-looking". Please refer to the
"Cautionary Statement about Forward-Looking Statements" section of this document
for an explanation of these types of assertions.

ITEM 1.  BUSINESS

Background

         St. Mary Land & Exploration Company is an independent energy
company engaged in the exploration, development, acquisition and production of
natural gas and crude oil. St. Mary was founded in 1908 and incorporated in
Delaware in 1915. Our operations are focused in the following five core
operating areas in the United States:

         o        the Mid-Continent region in Oklahoma and northern Texas;

         o        the ArkLaTex region that spans northern Louisiana and portions
                  of Arkansas, Mississippi and eastern Texas;

         o        the onshore Gulf Coast and offshore Gulf of Mexico;

         o        the Rocky Mountain region consisting of the Williston Basin in
                  eastern Montana and western North Dakota and the Powder River,
                  Green River and Wind River Basins in Wyoming; and

         o        the Permian Basin in eastern New Mexico and western Texas.

         As of December 31, 2002, we had estimated proved reserves of
approximately 36.1 MMBbls of oil and 274.2 Bcf of natural gas, or a total of
490.9 BCFE, 88% of which were proved developed and 56% of which were natural
gas, with a PV-10 value of $824.8 million. For the year ended December 31, 2002,
we produced 55.1 BCFE representing average daily production of 150.8 MMCFE per
day.

         We focus our resources in selected domestic basins where we believe
that our expertise in geology, geophysics and drilling and completion techniques
provides us with competitive advantages. We have assembled a balanced program of
low-to-medium-risk development and exploitation projects to provide the
foundation for steady growth. In addition, we have a portfolio of
higher-potential exploration projects and non-conventional gas plays in the
Rocky Mountain region that we believe could significantly increase our reserves
and production. We measure and rank our investment decisions based on their
risk-adjusted impact on per share net asset value. In the past, we have sold
selected assets when we believed attractive prices were available, and we will
continue to evaluate such opportunities in the future.

         We seek to develop our existing property base and acquire acreage with
additional potential in our core areas. From January 1, 2000, through December
31, 2002, we participated in the drilling or recompletion of 623 gross wells
with an average success rate of 82%. During that same period we added estimated


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proved reserves of 347 BCFE at an average finding cost of $1.44 per MCFE. Our
average annual production replacement was 214% during this three-year period,
and our production has grown at an average rate of 21% per year over the same
time period.

         As of December 31, 2002, we had an acreage position of 1,145,507 gross
(542,736 net) acres of which 504,873 gross (325,290 net) acres were undeveloped.
For 2003 we have budgeted capital expenditures of $135 million for ongoing
development, exploitation and exploration programs in our core operating areas
and $90 million for acquisitions of oil and gas properties.

         Our principal offices are located at 1776 Lincoln Street, Suite 700,
Denver, Colorado 80203, and our telephone number is (303) 861-8140.

Business Strategy

         Our objective is to build stockholder value through consistent economic
growth in reserves and production that increase net asset value per share, cash
flow per share and earnings per share. The principal elements of our strategy
are as follows:

         o        Maintain Focused Geographic Operations. We focus on
                  exploration, development and acquisition activities in five
                  core operating areas where we have built a balanced portfolio
                  of proved reserves, development drilling opportunities and
                  higher-potential exploration and non-conventional gas
                  prospects. We believe that our leasehold position is a
                  strategic asset. Our senior technical managers, each
                  possessing over 20 years of experience, head up regional
                  technical offices supported by centralized administration in
                  our Denver office. We believe that our long-standing presence,
                  our established networks of local industry relationships and
                  our acreage holdings in our core operating areas provide us
                  with a competitive advantage. In addition, we believe that we
                  can continue to expand our operations without the need to
                  proportionately increase the number of employees.

         o        Continue Exploitation and Development of Existing Properties.
                  We use our comprehensive base of geological, geophysical,
                  engineering and production experience in each of our core
                  operating areas to source prospects for our ongoing
                  low-to-medium-risk development and exploitation programs. We
                  conduct detailed geologic studies and use an array of
                  technologies and tools including 2-D and 3-D seismic imaging,
                  hydraulic fracturing and reservoir stimulation techniques, and
                  specialized logging tools to enhance the potential of our
                  existing properties. In 2002 we participated in the drilling
                  or recompletion of 168 gross wells with a 79% success rate.

         o        Pursue Higher-Risk Higher-Potential Exploration Projects. We
                  have allocated approximately 7% of our 2003 drilling and
                  exploration capital expenditures budget to higher-potential
                  exploration and unconventional gas projects. Our strategy is
                  to test several of these prospects each year that in total
                  have the potential to significantly increase our reserves. We
                  seek to invest in a diversified mix of projects and generally
                  limit our capital exposure by participating with other
                  experienced industry partners. We plan to test projects in the
                  Mid-Continent region and Rocky Mountain area during 2003.

         o        Make Selective Acquisitions. We seek to make selective niche
                  acquisitions of oil and gas properties that complement our
                  existing operations, offer economies of scale and provide


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                  further development, exploitation and exploration
                  opportunities based on proprietary geologic concepts. We
                  believe that the focus on smaller, negotiated transactions
                  where we have specialized geologic knowledge or operating
                  experience has enabled us to acquire attractively priced and
                  under-exploited properties. In addition, we will pursue
                  corporate acquisitions that we believe will be accretive.
                  Examples of this type of acquisition include our 1999 Nance
                  Petroleum Corporation and King Ranch Energy, Inc.
                  acquisitions, both of which were acquired with our common
                  stock. We have budgeted $90.0 million for acquisitions in
                  2003, of which $74.0 million closed in January 2003, including
                  the acquisition of properties from Flying J Oil & Gas Inc.
                  and Big West Oil & Gas Inc. in exchange for the issuance
                  of 3,380,818 restricted shares of St. Mary common stock.

         o        Control Operations. We believe it is important to control
                  geologic and operational decisions as well as the timing of
                  those decisions. At December 31, 2002, we operated 31% of our
                  properties on a volume basis and 66% on a PV-10 value basis.
                  We are the operator of properties representing approximately
                  81% of our 2003 capital budget.

         o        Maintain Financial Flexibility. Conservative use of financial
                  leverage has long been a critical element of our strategy. We
                  believe that maintaining a strong balance sheet is a
                  significant competitive advantage that enables us to pursue
                  acquisition and other opportunities, especially in weaker
                  price environments. It also provides us with the financial
                  resources to weather periods of volatile commodity prices or
                  escalating costs.

Significant Developments Since December 31, 2001

         o        2002 Acquisitions of Oil and Gas Properties. In December 2002
                  St. Mary completed a $69.5 million acquisition of properties
                  in the Williston Basin from Burlington Resources Oil & Gas
                  Company LP. The properties are located in Montana and North
                  Dakota and produce approximately 3,100 barrels of oil and
                  3,300 Mcf of gas per day. Smaller acquisitions during 2002
                  included the $7.5 million Mid-Continent acquisition from
                  Merchant Resources LP, the $4.9 million acquisition in the
                  Huxley Field located in east Texas and $5.8 million in various
                  other properties. We used cash from our March 2002 senior
                  convertible note placement and borrowings under our bank
                  credit facility to fund these acquisitions.

         o        2003 Acquisition of Oil and Gas Properties. In January 2003
                  St. Mary issued 3,380,818 shares of its restricted common
                  stock valued at $71.6 million to acquire Rocky Mountain
                  properties from Flying J Oil & Gas Inc. and Big West Oil
                  & Gas Inc. This acquisition included properties located in
                  the Williston, Powder River and Green River Basins with 66.9
                  BCFE of proved reserves and production of approximately 2,100
                  barrels of oil and 8,200 Mcf of gas per day. We also received
                  a net amount of $2.8 million in cash for normal purchase price
                  adjustments. In addition, St. Mary made a non-recourse loan to
                  Flying J and Big West of $71.6 million at LIBOR plus 2% for up
                  to a 39-month period. The loan is secured by a pledge of the
                  shares of St. Mary stock issued to Flying J and Big West. The
                  loan was funded through borrowings under our bank credit
                  facility.

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         o        Increase in 2002 Year-End Reserves. Proved reserves increased
                  28% from December 31, 2001 to 490.9 BCFE as of December 31,
                  2002. We added 101.6 BCFE through acquisitions for cash and
                  40.3 BCFE from drilling activities. There were net upward
                  revisions of previous reserves totaling 26.4 BCFE. This upward
                  revision was the result of a 33.9 BCFE increase from price
                  revisions, which was partially offset by 7.5 BCFE in negative
                  performance revisions.

         o        New York Stock Exchange Listing. On November 20, 2002 St. Mary
                  Land & Exploration Company's common stock began trading on
                  the New York Stock Exchange. The Company believes the NYSE
                  will improve visibility with investors and the auction market
                  structure will help reduce intra-day volatility and increase
                  the liquidity in St. Mary's stock. Prior to November 20, 2002
                  St. Mary's common stock was traded on the Nasdaq National
                  Market System.

         o        Senior Convertible Notes. In March 2002 we issued in a private
                  placement a total of $100.0 million of our 5.75% senior
                  convertible notes due 2022 with a1/2% contingent interest
                  provision. We received net proceeds of $96.7 million after
                  deducting the initial purchasers' discount and offering
                  expenses paid by us. The notes are general unsecured
                  obligations and rank on a parity in right of payment with all
                  our existing and future senior indebtedness and other general
                  unsecured obligations. They are senior in right of payment to
                  all our future subordinated indebtedness. The notes are
                  convertible into our common stock at a conversion price of
                  $26.00 per share, subject to adjustment. We can redeem the
                  notes with cash in whole or in part at a repurchase price of
                  100% of the principal amount plus accrued and unpaid interest
                  beginning on March 20, 2007. The note holders have the option
                  of requiring us to repurchase the notes for cash at 100% of
                  the principal amount plus accrued and unpaid interest
                  (including contingent interest) upon (1) a change in control
                  of St. Mary or (2) on March 20, 2007, March 15, 2012 and March
                  15, 2017. On March 20, 2007, we may pay the repurchase price
                  with cash, shares of our common stock or any combination of
                  cash and our common stock. We are not restricted from paying
                  dividends, incurring debt, or issuing or repurchasing our
                  securities under the indenture for the notes. There are no
                  financial covenants in the indenture. We used a portion of the
                  net proceeds from the notes to repay our credit facility
                  balance and used the remaining net proceeds to fund a portion
                  of our 2002 capital expenditures.

         o        Revolving Credit Agreement. In January 2003 we entered into a
                  new long-term revolving credit agreement with nine banks. The
                  maximum loan amount is $300 million with a calculated
                  borrowing base of $250 million. We have reduced the commitment
                  amount to $150 million to meet our projected needs. The
                  maturity date is January 27, 2006. Interest is accrued based
                  on the borrowing base utilization and is currently LIBOR plus
                  1.25%.


Major Customers

         During 2002 there were no sales to individual customers that accounted
for more than 10% of our total oil and gas production revenue. During 2001 sales
to Transok Gas Company accounted for 12.0% and sales to BP Amoco accounted for
11.3% of our total oil and gas production revenue. During 2000 sales to BP Amoco
accounted for 22.3% of our total oil and gas production revenue.

                                       4


Employees and Office Space

         As of December 31, 2002, St. Mary had 185 full-time employees. None of
our employees are subject to a collective bargaining agreement. We consider our
relations with our employees to be good. We lease approximately 42,660 square
feet of office space in Denver, Colorado for our executive and administrative
offices, of which 9,479 square feet is subleased. We also lease approximately
14,990 square feet of office space in Tulsa, Oklahoma; approximately 11,740
square feet in Shreveport, Louisiana; approximately 7,500 square feet in
Lafayette, Louisiana; and approximately 15,830 square feet in Billings, Montana.

Title to Properties

         Substantially all of our working interests are held pursuant to leases
from third parties. A title opinion is usually obtained prior to the
commencement of drilling operations on properties. We have obtained title
opinions or conducted a thorough title review on substantially all of our
producing properties and believe that we have satisfactory title to such
properties in accordance with standards generally accepted in the oil and gas
industry. Our properties are subject to a mortgage under our credit facility,
customary royalty interests, liens for current taxes, and other burdens that we
believe do not materially interfere with the use of or affect the value of such
properties. We perform only a minimal title investigation before acquiring
undeveloped properties.

Competition

         The oil and gas industry is intensely competitive. Competition is
particularly intense in the acquisition of prospective oil and natural gas
properties and oil and gas reserves. Our competitive position depends on our
geological, geophysical and engineering expertise, our financial resources, and
our ability to select, acquire and develop proved reserves. We believe that the
locations of our leasehold acreage, our exploration, drilling and production
capabilities and the experience of our management and that of our industry
partners generally enable us to compete effectively in our core operating areas.
However, we compete with a substantial number of major and independent oil and
gas companies that have larger technical staffs and greater financial and
operational resources than we do. Many of these companies not only engage in the
acquisition, exploration, development and production of oil and natural gas
reserves, but also have refining operations, market refined products and
generate electricity. We also compete with other oil and natural gas companies
in attempting to secure drilling rigs and other equipment necessary for drilling
and completion of wells. Drilling equipment may be in short supply from time to
time.

Government Regulations

         Our business is subject to various federal, state and local laws and
governmental regulations that may be changed from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling bonds, reports concerning
operations, the spacing of wells, unitization and pooling of properties,
taxation and environmental protection. From time to time, regulatory agencies
have imposed price controls and limitations on production by restricting the
rate of flow of oil and gas wells below actual production capacity in order to
conserve supplies of oil and gas.

         St. Mary's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. We could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be


                                       5


incurred, and the payment of such liabilities could have a material adverse
effect on our financial condition and results of operations. We maintain
insurance coverage for our operations, including limited coverage for sudden
environmental damages, but we do not believe that insurance coverage for
environmental damage that occurs over time is available at a reasonable cost.
Moreover, we do not believe that insurance coverage for the full potential
liability that could be caused by sudden environmental damages is available at a
reasonable cost. Accordingly, we may be subject to liability or may lose
substantial portions of our properties in the event of certain environmental
damages. St. Mary could incur substantial costs to comply with environmental
laws and regulations.

         Energy Regulations. With respect to federal energy regulation, the
transportation and sale for resale of natural gas in interstate commerce have
historically been regulated pursuant to several laws enacted by Congress and
regulations promulgated under these laws by the Federal Energy Regulatory
Commission and its predecessor. In the past the federal government has regulated
the prices at which gas could be sold. Congress removed all price and non-price
controls affecting wellhead sales of natural gas effective January 1, 1993.
However, Congress could reenact price controls in the future.

         Our sales of natural gas are affected by the availability, terms and
cost of transportation. The price and terms of access to pipeline transportation
are subject to extensive federal and state regulation. From 1985 to the present,
several major regulatory changes have been implemented by Congress and the FERC
that affect the economics of natural gas production, transportation and sales.
In addition, the FERC is continually proposing and implementing new rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction, most notably interstate natural gas
transmission companies. These initiatives may also affect the intrastate
transportation of gas under certain circumstances. The stated purpose of many of
these regulatory changes is to promote competition among the various sectors of
the natural gas industry, and these initiatives generally reflect more
light-handed regulation.

         The ultimate impact of the complex rules and regulations issued by the
FERC since 1985 cannot be predicted. In addition, many aspects of these
regulatory developments have not become final but are still pending judicial and
final FERC decisions. We cannot predict what further action the FERC will take
on these matters. Some of the FERC's more recent proposals may, however,
adversely affect the availability and reliability of interruptible
transportation service on interstate pipelines. Additional proposals and
proceedings that might affect the natural gas industry are pending before
Congress and the courts. The natural gas industry historically has been very
heavily regulated; therefore, there is no assurance that the less stringent
regulatory approach recently pursued by the FERC and Congress will continue. We
do not believe that we will be affected by any action taken that differs
materially from other natural gas producers and marketers with whom we compete.

         Our sales of crude oil, condensate and natural gas liquids are
currently not regulated and are made at market prices. However, in a number of
instances the ability to transport and sell such products are dependent on
pipelines whose rates, terms and conditions of service are subject to FERC
jurisdiction under the Interstate Commerce Act. Certain regulations implemented
by the FERC in recent years could result in an increase in the cost of
transportation service on certain petroleum product pipelines. We do not believe
that these regulations affect us any differently than other producers of these
products.

         Certain operations we conduct are on federal oil and gas leases that
the Minerals Management Service administers. The MMS issues such leases through


                                       6


competitive bidding. These leases contain relatively standardized terms and
require compliance with detailed MMS regulations and, for offshore leases,
orders pursuant to the Outer Continental Shelf Lands Act, which are subject to
change by the MMS. For offshore operations, lessees must obtain MMS approval for
exploration plans and development and production plans prior to the commencement
of such operations. In addition to permits required from other agencies such as
the Coast Guard, the Army Corps of Engineers and the Environmental Protection
Agency, lessees must obtain a permit from the MMS prior to the commencement of
drilling. Lessees must also comply with detailed MMS regulations governing,
among other things:

         o        engineering and construction specifications for offshore
                  production facilities;

         o        safety procedures;

         o        flaring of production;

         o        plugging and abandonment of Outer Continental Shelf or OCS
                  wells;

         o        calculation of royalty payments and the valuation of
                  production for this purpose; and

         o        removal of facilities.

         To cover the various obligations of lessees on the OCS, the MMS
generally requires that lessees post substantial bonds or other acceptable
assurances that such obligations will be met. The cost of such bonds or other
surety can be substantial, and we cannot assure that we can continue to obtain
bonds or other surety in all cases. Under certain circumstances the MMS may
require our operations on federal leases to be suspended or terminated.

         Many of the states in which we conduct our oil and gas drilling and
production activities regulate such activities by requiring, among other things,
drilling permits and bonds and reports concerning operations. The laws of these
states also govern a number of environmental and conservation matters, including
the handling and disposing of waste material, plugging and abandonment of wells,
restoration requirements, unitization and pooling of natural gas and oil
properties and establishment of maximum rates of production from natural gas and
oil wells. Some states prorate production to the market demand for oil and
natural gas.

         Environmental Regulations. Our operations are subject to numerous laws
and regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for any
pollution resulting from our operations.

         Public interest in the protection of the environment has increased
dramatically in recent years. Onshore and offshore drilling in some areas has
been opposed by environmental groups and, in some areas, has been restricted.
Legislation has also been proposed in Congress from time to time that would
reclassify certain oil and gas exploration and production wastes as "hazardous
wastes," which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. To the extent laws are enacted or
other governmental actions are taken that prohibit or restrict offshore drilling


                                       7


or impose environmental protection requirements that result in increased costs
to the natural gas and oil industry (both onshore and offshore), our business
and prospects could be adversely affected. We believe that we are in substantial
compliance with current applicable environmental laws and regulations and that
continued compliance with existing requirements would not have a material
adverse impact on us.

         Violation of environmental laws and regulations can lead to the
imposition of administrative, civil or criminal penalties; remedial obligations;
and in some instances injunctive relief. In addition, violations of
environmental laws or the discharge of hazardous materials or oil could result
in liability for personal injuries, property damage, remediation and cleanup
costs, and other environmental damages. As a result, substantial liabilities to
third parties or governmental entities may be incurred, and the payment of such
liabilities could have a material adverse effect on our financial condition and
results of operations.

         The Oil Pollution Act and regulations thereunder impose a variety of
regulations on "responsible parties" related to the prevention of oil spills and
liability for damages resulting from such spills in United States waters. A
"responsible party" includes the owner or operator of an onshore facility,
pipeline or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
cleanup costs and a variety of public and private damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction or operating
regulation. Likewise, if the party fails to report a spill or to cooperate fully
in the cleanup, liability limits do not apply. Even if applicable, the liability
limits for offshore facilities require the responsible party to pay all removal
costs, plus up to $75 million in other damages. Few defenses exist to the
liability imposed by the OPA.

         The OPA imposes ongoing requirements on a responsible party, including
the preparation of oil spill response plans and proof of financial
responsibility to cover environmental cleanup and restoration costs that could
be incurred in connection with an oil spill. As amended by the Coast Guard
Authorization Act of 1996, the OPA requires responsible parties for covered
offshore facilities that have a worst case oil spill of more than 1,000 barrels
to demonstrate financial responsibility in amounts ranging from at least $10
million in specified state waters to at least $35 million in federal outer
continental shelf waters, with higher amounts of up to $150 million if a formal
risk assessment indicates that a higher amount should be required based on
specific risks posed by the operations or if the worst case oil spill discharge
volume possible at the facility may exceed the applicable threshold volumes
specified under the final rule of the MMS implementing these financial
responsibility requirements as enacted in August 1998. We do not anticipate that
we will experience any difficulty in continuing to satisfy the MMS requirements
for demonstrating financial responsibility under the OPA.

         The Federal Water Pollution Control Act, also known as the Clean Water
Act, imposes restrictions and strict controls regarding the discharge of
produced waters and other oil and gas wastes into navigable waters. Permits must
be obtained to discharge pollutants into waters and to conduct construction
activities in waters and wetlands. The FWPCA and similar state laws provide for
civil, criminal and administrative penalties for any unauthorized discharges of
pollutants and unauthorized discharges of reportable quantities of oil and other
hazardous substances. Many state discharge regulations and the general permits
from the Federal National Pollutant Discharge Elimination System prohibit the
discharge of produced water and sand, drilling fluids, drill cuttings and
certain other substances related to the oil and gas industry into coastal
waters. Although the costs to comply with zero discharge mandates under federal
or state law may be significant, the entire industry is expected to experience
similar costs, and we believe that these costs will not have a material adverse

                                       8


impact on our results of operations or financial position. The United States
Environmental Protection Agency has adopted regulations requiring certain oil
and gas exploration and production facilities to obtain permits for storm water
discharges. Costs may be associated with the treatment of wastewater or
developing and implementing storm water pollution prevention plans.

         The Comprehensive Environmental Response, Compensation, and Liability
Act, also known as the "Superfund" law, imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons
that are considered to be responsible for the release of a "hazardous substance"
into the environment. These persons, including the owner or operator of the
disposal site or sites where the release occurred and companies that transported
or disposed or arranged for the transport or disposal of the hazardous
substances under CERCLA, may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources. It is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment.

         We generate both hazardous and nonhazardous solid wastes which are
subject to requirements of the Federal Resource Conservation and Recovery Act
and comparable state statutes. From time to time, the EPA has considered making
changes in nonhazardous waste standards that would result in stricter disposal
requirements for these wastes. Furthermore, it is possible that some wastes that
we generate that are currently classified as nonhazardous may be in the future
be designated as "hazardous wastes," resulting in the wastes being subject to
more rigorous and costly disposal requirements. Changes in applicable
regulations may result in an increase in our capital expenditures or operating
expenses.

         We currently own or lease, and have in the past owned or leased,
onshore properties that for many years have been utilized for or associated with
the exploration and production of oil and gas. Although we have utilized
operating and disposal practices that were standard in the industry at the time,
hydrocarbons or other wastes may have been disposed of or released on or under
the properties owned or leased by us or on or under other locations where such
wastes have been taken for disposal. These properties and the wastes disposed
thereon may be subject to CERCLA, RCRA and analogous state laws. Under such
laws, we could be required to remove or remediate previously disposed wastes
(including waste disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination by prior owners or
operators), or to perform remedial plugging or closure operations to prevent
future contamination.

         Our operations are also subject to the Federal Clean Air Act and
comparable state statutes. Amendments to the Clean Air Act adopted in 1990
contain provisions that may result in the imposition of increasingly stringent
pollution control requirements with respect to air emissions from the operations
of stationary and mobile source equipment. Such air pollution control
requirements may include specific equipment or technologies, permits with
emissions and operational limitations, pre-approval of new or modified projects
or facilities producing air emissions, and similar measures. Failure to comply
with applicable air statutes or regulations may lead to the assessment of
administrative, civil or criminal penalties, and/or result in the limitation or
cessation of construction or operation of certain air emission sources.


                                       9


Risk Factors

Risks Related to Our Business

         In addition to the other information set forth elsewhere in this Form
10-K, the following factors should be carefully considered when evaluating St.
Mary.

Oil and natural gas prices are volatile, and an extended decline in prices would
hurt our profitability and financial condition.

         Our revenues, operating results, profitability, future rate of growth
and the carrying value of our oil and gas properties depend heavily on
prevailing market prices for oil and gas. We expect the markets for oil and gas
to continue to be volatile. Any substantial or extended decline in the price of
oil or gas would have a material adverse effect on our financial condition and
results of operations. It could reduce our cash flow and borrowing capacity, as
well as the value and the amount of our oil and gas reserves. Lower prices may
also reduce the amount of oil and gas that we can economically produce.

         Historically, the markets for oil and gas have been volatile, and they
are likely to continue to be volatile. Wide fluctuations in oil and gas prices
may result from relatively minor changes in the supply of and demand for oil and
gas, market uncertainty and other factors that are beyond our control,
including:

         o        worldwide and domestic supplies of oil and natural gas;

         o        the ability of the members of the Organization of Petroleum
                  Exporting Countries to agree to and maintain oil price and
                  production controls;

         o        political instability or armed conflict in oil or gas
                  producing regions;

         o        the price and level of foreign imports;

         o        worldwide economic conditions;

         o        marketability of production;

         o        the level of consumer demand;

         o        the price, availability and acceptance of alternative fuels;

         o        the availability of pipeline capacity;

         o        weather conditions; and

         o        actions of federal, state, local and foreign authorities.

         These external factors and the volatile nature of the energy markets
make it difficult to estimate future prices of oil and natural gas. Declines in
oil and gas prices would reduce our revenue and could also reduce the amount of
oil and gas that we can produce economically and, as a result, could have a
material adverse effect on our financial condition, results of operations and
reserves. Further, oil and gas prices do not necessarily move in tandem. Because

                                       10


approximately 56% of our proved reserves were natural gas reserves as of
December 31, 2002, our financial results are slightly more affected by changes
in natural gas prices.

A material portion of our production, revenues and cash flows are derived from
one field.

         Production from the Judge Digby Field accounted for approximately 10%
of our total oil and gas production volumes during 2002. If the level of
production from this field substantially declines other than through normal
depletion over the expected reserve life, it could have a material adverse
impact on our overall production levels and our revenues.

Our future success depends on our ability to replace reserves that we produce.

         Our future success depends on our ability to find, develop and acquire
oil and gas reserves that are economically recoverable. As of December 31, 2002
our proved reserves would last approximately 8.9 years if produced constantly at
the 2002 rate of production. In order to maintain current production rates we
must locate and develop or acquire new oil and gas reserves to replace those
being depleted by production. We may do this even during periods of low oil and
gas prices. Without successful exploration or acquisition activities, our
reserves, production and revenues will decline rapidly. In addition,
approximately 12% of our total estimated proved reserves at December 31, 2002,
were undeveloped. By their nature, undeveloped reserves are less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. We cannot assure you that we will be able to
find and develop or acquire additional reserves at an acceptable cost.

Our producing property acquisitions carry significant risks.

         Our recent growth is due in part to, and our growth strategy relies in
part on, acquisitions of producing properties and exploration and production
companies. Successful acquisitions require an assessment of a number of factors
beyond our control. These factors include recoverable reserves, future oil and
gas prices, operating costs and potential environmental and other liabilities.
These assessments are inexact and their accuracy is inherently uncertain. In
connection with these assessments, we perform a review of the subject properties
that we believe is generally consistent with industry practices. However, such a
review will not reveal all existing or potential problems. In addition, our
review may not permit us to become sufficiently familiar with the properties to
fully assess their deficiencies and capabilities. We do not inspect every well.
Even when we do inspect a well, we may not always discover structural,
subsurface or environmental problems that may exist or arise.

         In connection with our acquisitions, we may not be entitled to
contractual indemnification for preclosing liabilities, including environmental
liabilities. Normally, we acquire interests in properties on an "as is" basis
with limited remedies for breaches of representations and warranties. In
addition, competition for producing oil and gas properties is intense and many
of our competitors have financial and other resources substantially greater than
those available to us. Therefore, we cannot assure you that we will be able to
acquire oil and gas properties that contain economically recoverable reserves or
that we will acquire such properties at acceptable prices.

         Additionally, significant acquisitions can change the nature of our
operations and business depending upon the character of the acquired properties,
which may have substantially different operating and geological characteristics
or be in different geographic locations than our existing properties. While it


                                       11


is our current intention to continue to concentrate on acquiring properties with
development, exploitation and exploration potential located in our five core
operating areas, we cannot assure you that in the future we will not decide to
pursue acquisitions of properties located in other geographic regions. To the
extent that such acquired properties are substantially different than our
existing properties, our ability to efficiently realize the expected economic
benefits of such transactions may be limited.

We may not be able to successfully integrate future property or corporate
acquisitions.

         We seek to make selective niche acquisitions of oil and gas properties,
and we will pursue corporate acquisitions that we believe will be accretive.
However, integrating acquired properties and businesses involves a number of
special risks. These risks include the possibility that management may be
distracted from normal business concerns by the need to integrate operations and
systems and in retaining and assimilating additional employees. Any of these or
other similar risks could lead to potentially adverse short-term or long-term
effects on our operating results. We cannot assure you that we will be able to
obtain adequate funds for future property or corporate acquisitions,
successfully integrate our future property or corporate acquisitions or that we
will realize any of the anticipated benefits of the acquisitions.

Substantial capital is required to replace and grow reserves.

         We make, and will continue to make, substantial expenditures to find,
acquire, develop and produce oil and natural gas reserves. Our capital
expenditures for oil and gas properties were $193.0 million for 2002 and $182.9
million during 2001. We have budgeted total capital expenditures of $225.0
million in 2003. With the cash provided by operating activities and borrowings
under our credit facility, we believe we will have sufficient cash to fund
budgeted capital expenditures in 2003. If additional development or attractive
acquisition opportunities arise, we may consider other forms of financing,
including the public offering or private placement of equity or debt securities.
However, if oil and gas prices decrease or we encounter operating difficulties
that result in our cash flow from operations being less than expected, we may
have to reduce the capital we can spend in future years unless we raise
additional funds through debt or equity financing. We cannot assure you that
debt or equity financing, cash generated by operations or borrowing capacity
will be available to us on acceptable terms to meet these requirements.

         Future cash flows and the availability of financing will be subject to
a number of variables, such as:

         o        our success in locating and producing new reserves;

         o        the level of production from existing wells;

         o        prices of oil and natural gas;

         o        lease operating expense, including workovers and taxes; and

         o        administrative expense.

         Issuing equity securities to satisfy our financing requirements could
cause substantial dilution to existing stockholders. Debt financing could lead
to:

                                       12


         o        a substantial portion of our operating cash flow being
                  dedicated to the payment of principal and interest;

         o        us being more vulnerable to competitive pressures and economic
                  downturns; and

         o        restrictions on our operations.

         If our revenues were to decrease due to lower oil and natural gas
prices, decreased production or other reasons, and if we could not obtain
capital through our credit facility or otherwise, our ability to execute our
development plans, replace our reserves or maintain production levels could be
greatly limited.

We may not obtain a bank credit facility borrowing base redetermination that
adequately meets our anticipated financing needs.

         We closed a new long-term revolving credit facility in January 2003
with a 9-bank group led by Wachovia Bank. Under the facility, the maximum loan
amount is $300.0 million. The amount actually available from time to time
depends on a borrowing base that the lenders periodically redetermine based on
the value of our oil and gas properties and other assets. The stated total
borrowing base is $215.0 million and will be increased to $250.0 million after
sufficient mortgage collateral has been provided to the banks. Since we pay
commitment fees based on the unused portion of the borrowing base, we have
reduced the commitment that we have accepted under the borrowing base to $150.0
million to correspond with our projected funding requirements.

         Our next borrowing base redetermination date is scheduled to occur on
or about April 15, 2003. We cannot assure you that the banks will agree to a
borrowing base redetermination that is adequate for our anticipated financing
needs.

If oil and gas prices decrease or exploration efforts are unsuccessful, we may
be required to take additional writedowns.

         There is a risk that we will be required to write down the carrying
value of our oil and gas properties. This could occur when oil and gas prices
are low or if we have substantial downward adjustments to our estimated proved
reserves, increases in our estimates of development costs or deterioration in
our exploration results.

         We follow the successful efforts accounting method. All property
acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending the determination of whether proved reserves have been
discovered. If proved reserves are not discovered with an exploratory well, the
costs of drilling the well are expensed. All geological and geophysical costs on
exploratory prospects are expensed as incurred. The capitalized costs of our oil
and gas properties, on a field-by-field basis, may not exceed the estimated
future net cash flows of that field. If capitalized costs exceed future net
revenues we write down the costs of each such field to our estimate of fair
market value. Unproved properties are evaluated at the lower of cost or fair
market value. This type of charge will not affect our cash flow from operating
activities, but it will reduce the book value of our stockholders' equity. We
review the carrying value of our properties quarterly, based on prices in effect
as of the end of each quarter or as of the time of reporting our results. Once
incurred, a writedown of oil and gas properties is not reversible at a later


                                       13


date even if oil or gas prices increase. St. Mary incurred impairment and
abandonment charges on proved and unproved properties of $2.4 million, $4.7
million and $6.3 million in 2002, 2001 and 2000, respectively.

Information concerning our reserves and future net revenue estimates is
uncertain.

         There are numerous uncertainties inherent in estimating quantities of
proved oil and natural gas reserves and their values, including many factors
beyond our control. Estimates of proved undeveloped reserves, which comprise a
significant portion of our reserves, are by their nature uncertain. The reserve
data included in this Annual Report on Form 10-K is estimated. Although we
believe these estimates are reasonable, actual production, revenues and reserve
expenditures will likely vary from estimates, and these variances may be
material.

         Estimates of oil and natural gas reserves, by necessity, are
projections based on geologic and engineering data, and there are uncertainties
inherent in the interpretation of such data as well as the projection of future
rates of production and the timing of development expenditures. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and natural gas that are difficult to measure. The accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation and judgment. Estimates of economically recoverable
oil and natural gas reserves and future net cash flows necessarily depend upon a
number of variable factors and assumptions, such as historical production from
the area compared with production from other producing areas, the assumed
effects of regulations by governmental agencies and assumptions governing future
oil and natural gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows may vary substantially.
Any significant variance in the assumptions could materially affect the
estimated quantity and value of the reserves. Actual production, revenues and
expenditures with respect to our reserves will likely vary from estimates, and
such variances may be material. See "Business and Properties--Reserves."

         In addition, you should not construe PV-10 value as the current market
value of the estimated oil and natural gas reserves attributable to our
properties. We have based the PV-10 value on prices and costs as of the date of
the estimate, in accordance with applicable regulations, whereas actual future
prices and costs may be materially higher or lower. For example, values of our
reserves at December 31, 2002 were estimated starting with a calculated weighted
average sales price of $31.20 per barrel of oil (NYMEX) and $4.74 per MMBtu of
gas (Gulf Coast spot price), then adjusted for transportation, quality and basis
differentials. During 2002 our monthly average realized gas prices were as high
as $3.99 per Mcf and as low as $2.24 per Mcf. For the same period our monthly
average realized oil prices were as high as $27.66 per Bbl and as low as $17.72
per Bbl. Many factors will affect actual future net cash flows, including:

         o        the amount and timing of actual production;

         o        supply and demand for oil and natural gas;

         o        curtailments or increases in consumption by natural gas
                  purchasers; and

         o        changes in governmental regulations or taxation.

                                       14


         The timing of the production of oil and natural gas properties and of
the related expenses affect the timing of actual future net cash flows from
proved reserves and, thus, their actual present value. In addition, the 10%
discount factor, which we are required to use to calculate PV-10 value for
reporting purposes, is not necessarily the most appropriate discount factor
given actual interest rates and risks to which our business or the oil and
natural gas industry in general are subject. As a result, our actual future net
cash flows could be materially different from the estimates included in this
Annual Report on Form 10-K.

Our industry is highly competitive.

         Major oil companies, independent producers, and institutional and
individual investors are actively seeking oil and gas properties throughout the
world, along with the equipment, labor and materials required to operate
properties. Many of our competitors have financial and technological resources
vastly exceeding those available to us. Many oil and gas properties are sold in
a competitive bidding process in which we may lack technological information or
expertise available to other bidders. We cannot be sure that we will be
successful in acquiring and developing profitable properties in the face of this
competition.

Exploration and development drilling may not result in commercially productive
reserves.

         Oil and gas drilling and production activities are subject to numerous
risks, including the risk that no commercially productive oil or natural gas
will be found. The cost of drilling and completing wells is often uncertain, and
oil and gas drilling and production activities may be shortened, delayed or
canceled as a result of a variety of factors, many of which are beyond our
control. These factors include:

         o        unexpected drilling conditions;

         o        pressure or irregularities in formations;

         o        equipment failures or accidents;

         o        adverse weather conditions;

         o        shortages in experienced labor;

         o        compliance with governmental requirements; and

         o        shortages or delays in the availability of drilling rigs and
                  the delivery of equipment.

         The prevailing prices of oil and gas also affect the cost of and the
demand for drilling rigs, production equipment and related services.

         We cannot assure you that the wells we drill will be productive or that
we will recover all or any portion of our investment in such wells. The seismic
data and other technologies we use do not allow us to know conclusively prior to
drilling a well that oil or gas is present or may be produced economically. The
cost of drilling, completing and operating a well is often uncertain, and cost
factors can adversely affect the economics of a project. Drilling activities can
result in dry wells or wells that are productive but do not produce sufficient
net revenues after operating and other costs to cover initial drilling costs.

                                       15


         Our future drilling activities may not be successful, nor can we be
sure that our overall drilling success rate or our drilling success rate for
activity within a particular area will not decline. Unsuccessful drilling
activities could have a material adverse effect on our results of operations and
financial condition. Also, we may not be able to obtain any options or lease
rights in potential drilling locations that we identify. Although we have
identified numerous potential drilling locations, we cannot be sure that we will
ever drill them or that we will produce oil or natural gas from them or any
other potential drilling locations.

Our business is subject to operating hazards that could result in substantial
losses.

         Oil and gas operations are subject to many risks, including well
blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline ruptures or
spills, pollution, releases of toxic gas and other environmental hazards and
risks. If any of these hazards occurs, we could sustain substantial losses as a
result of:

         o        injury or loss of life;

         o        severe damage to or destruction of property, natural resources
                  and equipment;

         o        pollution or other environmental damage;

         o        clean-up responsibilities;

         o        regulatory investigations and penalties; and/or

         o        suspension of operations.

         In addition, we may be liable for environmental damage caused by
previous owners of property we own or lease. As a result, we may face
substantial liabilities to third parties or governmental entities, which could
reduce or eliminate funds available for exploration, development or acquisitions
or cause us to incur losses. An event that is not fully covered by insurance
could have a material adverse effect on our financial condition and results of
operations.

         We maintain insurance against some, but not all, of these potential
risks and losses. We may elect not to obtain insurance if we believe that the
cost of available insurance is excessive relative to the risks presented. In
addition, pollution and environmental risks generally are not fully insurable.
If a significant accident or other event occurs and is not fully covered by
insurance, it could adversely affect us.

Other independent oil and gas companies' limited access to capital may change
our exploration and development plans.

         Many independent oil and gas companies have limited access to the
capital necessary to finance their activities. As a result, some of the other
working interest owners of our wells may be unwilling or unable to pay their
share of the costs of projects as they become due. These problems could cause us
to change, suspend or terminate our drilling and development plans with respect
to the affected project.

                                       16


Hedging transactions may limit our potential gains and involve other risks.

         To manage our exposure to price risks in the marketing of our oil and
natural gas, we enter into commodity price risk management arrangements from
time to time with respect to a portion of our current or future production.
While intended to reduce the effects of volatile oil and natural gas prices,
these transactions may limit our potential gains if oil or natural gas prices
were to rise substantially over the price established by the hedge. In addition,
such transactions may expose us to the risk of financial loss in certain
circumstances, including instances in which:

         o        our production is less than expected;

         o        the counterparties to our futures contracts fail to perform
                  under the contracts; or

         o        a sudden, unexpected event materially impacts oil or natural
                  gas prices.

         The terms of our hedging agreements may also require that we furnish
cash collateral, letters of credit or other forms of performance assurance in
the event that mark-to-market calculations result in settlement obligations by
us to the counterparties, which would encumber our liquidity and capital
resources.

Our industry is heavily regulated.

         Federal, state and local authorities extensively regulate the oil and
gas industry. Legislation and regulations affecting the industry are under
constant review for amendment or expansion, raising the possibility of changes
that may affect, among other things, the pricing or marketing of oil and gas
production. Noncompliance with statutes and regulations may lead to substantial
penalties, and the overall regulatory burden on the industry increases the cost
of doing business and, in turn, decreases profitability. State and local
authorities regulate various aspects of oil and gas drilling and production
activities, including the drilling of wells (through permit and bonding
requirements), the spacing of wells, the unitization or pooling of oil and gas
properties, environmental matters, safety standards, the sharing of markets,
production limitations, plugging and abandonment, and restoration. Federal
authorities regulate many of these same activities for our drilling and
production operations in federal offshore waters. To cover the various
obligations of leaseholders in federal waters, federal authorities generally
require that leaseholders have substantial net worth or post bonds or other
acceptable assurances that such obligations will be met. The cost of these bonds
or other surety can be substantial, and we cannot assure you that we will be
able to obtain bonds or other surety in all cases. Under some circumstances,
federal authorities may require any of our operations on federal leases be
suspended or terminated. Any such suspension or termination could materially
adversely affect our financial condition and results of operations.

We must comply with complex environmental regulations.

         Our operations are subject to complex and constantly changing
environmental laws and regulations adopted by federal, state and local
governmental authorities where we are engaged in exploration or production
operations. New laws or regulations, or changes to current requirements, could
have a material adverse effect on our business. We will continue to be subject
to uncertainty associated with new regulatory interpretations and inconsistent
interpretations between state and federal agencies. We could face significant
liabilities to the government and third parties for discharges of oil, natural
gas or other pollutants into the air, soil or water, and we could have to spend
substantial amounts on investigations, litigation and remediation. We cannot be
sure that existing environmental laws or regulations, as currently interpreted


                                       17


or enforced, or as they may be interpreted, enforced or altered in the future,
will not materially adversely affect our results of operations and financial
condition. As a result, we may face material indemnity claims with respect to
properties we own or have owned.

Our business depends on transportation facilities owned by others.

         The marketability of our oil and gas production depends in part on the
availability, proximity and capacity of pipeline systems owned by third parties.
The unavailability of or lack of available capacity on these systems and
facilities could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. Although we have some
contractual control over the transportation of our product, material changes in
these business relationships could materially affect our operations. Federal and
state regulation of oil and gas production and transportation, tax and energy
policies, changes in supply and demand, pipeline pressures, damage to or
destruction of pipelines and general economic conditions could adversely affect
our ability to produce, gather and transport oil and natural gas.

We depend on key personnel.

         Our success will continue to depend on the continued services of our
executive officers and a limited number of other senior management and technical
personnel with extensive experience and expertise in evaluating and analyzing
producing oil and gas properties and drilling prospects, maximizing production
from oil and gas properties and marketing oil and gas production. Loss of the
services of any of these people could have a material adverse effect on our
operations. We currently do not have employment agreements with our executive
officers other than Mark Hellerstein, our Chief Executive Officer. We do not
carry any key person life insurance policies.

Ownership of working interests, royalty interests and other interests by some of
our officers and directors may create conflicts of interest.

         As a result of their prior employment with another company with which
St. Mary engaged in a number of transactions, Ronald D. Boone, the Executive
Vice President and Chief Operating Officer and a director of St. Mary, and two
other vice presidents of St. Mary own royalty interests in many of St. Mary's
properties, which were earned as part of the prior employer's employee benefit
programs. One vice president also owns certain working interests through
participation in acquisitions made by his former employer. Those persons have no
royalty participation in any new St. Mary properties.

         Mr. Boone also owns 25% of Princeton Resources LLC, which owns the oil
and gas working interests that he acquired as a result of his prior employment.
Although Mr. Boone does not manage this entity, he may participate in any
investment decisions made by them.

         As a result of these transactions and relationships, conflicts of
interest may exist between these persons and us. Although these persons owe
fiduciary duties to our stockholders and to us, we cannot assure you that
conflicts of interest will always be resolved in our favor.

Risks Related to Our Common Stock

Our certificate of incorporation and bylaws have provisions that discourage
corporate takeovers and could prevent shareholders from realizing a premium on
their investment.

                                       18


         Our certificate of incorporation and bylaws contain provisions that may
have the effect of delaying or preventing a change of control. These provisions,
among other things, provide for noncumulative voting in the election of the
board of directors and impose procedural requirements on stockholders who wish
to make nominations for the election of directors or propose other actions at
stockholders' meetings. These provisions, alone or in combination with each
other and with the rights plan described below, may discourage transactions
involving actual or potential changes of control, including transactions that
otherwise could involve payment of a premium over prevailing market prices to
shareholders for their common stock

         On July 15, 1999, our board of directors adopted a stockholder rights
plan. The plan is designed to enhance the board's ability to prevent an acquirer
from depriving stockholders of the long-term value of their investment and to
protect stockholders against attempts to acquire us by means of unfair or
abusive takeover tactics. If the board of directors decides in accordance with
its fiduciary obligations that the terms of a potential acquisition do not
reflect the long-term value of St. Mary, under the plan the board of directors
could allow the holder of each outstanding share of our common stock other than
those held by the potential acquirer to purchase one additional share of our
common stock with a market value of twice the exercise price. This prospective
dilution to a potential acquirer would make the acquisition impracticable unless
the terms were improved to the satisfaction of the board of directors. However,
the existence of the plan may impede a takeover not supported by our board,
including a takeover that may be desired by a majority of our stockholders or
involving a premium over the prevailing stock price.

Our shares that are eligible for future sale may have an adverse effect on the
price of our common stock.

         At February 28, 2003, we had 31,433,900 shares of common stock
outstanding. Of the shares outstanding, approximately 27,405,059 shares were
freely tradable without substantial restriction or the requirement of future
registration under the Securities Act. Also as of that date, options to purchase
3,025,007 shares of our common stock were outstanding, of which 1,911,398 were
exercisable. These options are exercisable at prices ranging from $9.25 to
$33.3125 per share. Sales of substantial amounts of common stock, or a
perception that such sales could occur, and the existence of options or warrants
to purchase shares of commons stock at prices that may be below the then -
current market price of the common stock could adversely affect the market price
of the common stock and could impair our ability to raise capital through the
sale of our equity securities.

Our Former Chairman of the Board and his extended family may be able to control
us.

         Thomas E. Congdon, a director and our former Chairman of the Board, and
members of his extended family owned approximately 16% of the outstanding shares
of our common stock as of February 28, 2003. While no formal arrangements exist,
these extended family members may be inclined to act in concert with Mr. Congdon
on matters related to control of St. Mary, including for example the election of
directors or response to an unsolicited bid to acquire St. Mary. Accordingly,
Mr. Congdon and his family may be able to control or influence matters presented
to our stockholders.

We may not always pay dividends on our common stock.

         Although we have paid cash dividends to stockholders every year since
1940 and we expect that our practice of paying dividends will continue, the
payment of future dividends remains in the discretion of the board of directors


                                       19


and will continue to depend on our earnings, capital requirements, financial
condition and other factors. In addition, the payment of dividends is subject to
covenants in our bank credit facility, including the requirement that we
maintain certain levels of stockholder's equity. The board of directors may
determine in the future to reduce the current annual dividend rate of $0.10 per
share or discontinue the payment of dividends altogether.

Cautionary Statement about Forward-Looking Statements

         This Annual Report on Form 10-K includes certain statements that may be
deemed to be "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. All statements, other than statements of historical facts, included in
this Form 10-K that address activities, events or developments that St. Mary's
management expects, believes or anticipates will or may occur in the future are
forward looking statements. Examples of forward-looking statements may include
discussion of such matters as:

         o        The amount and nature of future capital, development and
                  exploration expenditures;

         o        The drilling of wells;

         o        Reserve estimates and the estimates of both future net
                  revenues and the present value of future net revenues that are
                  included in their calculation;

         o        Future oil and gas production estimates;

         o        Repayment of debt;

         o        Business strategies;

         o        Expansion and growth of operations; and

         o        Other similar matters such as those discussed in Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations.

These statements are based on certain assumptions and analyses made by us in
light of our experience and our perception of historical trends, current
conditions, expected future developments and other factors we believe are
appropriate in the circumstances. Such statements are subject to a number of
assumptions, risks and uncertainties, including such factors as the volatility
and level of oil and natural gas prices, uncertainties in cash flow, expected
acquisition benefits, production rates and reserve replacement, reserve
estimates, drilling and operating risks, competition, litigation, environmental
matters, the potential impact of government regulations, and other matters
discussed under the caption "Risk Factors", many of which are beyond our
control. Readers are cautioned that forward-looking statements are not
guarantees of future performance and that actual results or developments may
differ materially from those expressed or implied in the forward-looking
statements.


                                       20


Available Information

         Our Internet website address is www.stmaryland.com. We make available
free of charge through our website's financial information section our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to those reports filed with or furnished to the SEC under
applicable securities laws as soon as reasonably practical after we
electronically file such material with, or furnish it to, the SEC. Our web site
information is not incorporated by reference into this Annual Report on Form
10-K.

Glossary

         The terms defined in this section are used throughout this Annual
Report on Form 10-K.

2-D seismic or 2-D data. Seismic data that are acquired and processed to yield a
two-dimensional cross-section of the subsurface.

3-D seismic or 3-D data. Seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.

Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to oil or other liquid hydrocarbons.

Bcf. Billion cubic feet, used herein in reference to natural gas.

BCFE. Billion cubic feet of gas equivalent. Gas equivalents are determined using
the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.

Behind pipe reserves. Estimated net proved reserves in a formation in which
production casing has already been set in the wellbore but has not been
perforated and production tested.

BOE. Barrels of oil equivalent. Oil equivalents are determined using the ratio
of six Mcf of gas (including gas liquids) to one Bbl of oil.

Development well. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.

Dry hole. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.

Estimated net proved reserves. The estimated quantities of oil, gas and 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.

Exploratory well. A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir, or to extend a known reservoir.

Fee land. The most extensive interest that can be owned in land, including
surface and mineral (including oil and gas) rights.

                                       21


Finding cost. Expressed in dollars per BOE or MCFE. Finding costs are calculated
by dividing the amount of total capital expenditures for oil and gas activities
by the amount of estimated net proved reserves added during the same period
(including the effect on proved reserves of reserve revisions).

Gross acres. An acre in which a working interest is owned.

Gross well. A well in which a working interest is owned.

Hydraulic fracturing. A procedure to stimulate production by forcing a mixture
of fluid and proppant (usually sand) into the formation under high pressure.
This creates artificial fractures in the reservoir rock, which increases
permeability and porosity.

MBbl. One thousand barrels of oil or other liquid hydrocarbons.

MMBbl. One million barrels of oil or other liquid hydrocarbons.

MBOE. One thousand barrels of oil equivalent.

MMBOE. One million barrels of oil equivalent.

Mcf. One thousand cubic feet.

MCFE. One thousand cubic feet of gas equivalent. Gas equivalents are determined
using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.

MMcf. One million cubic feet.

MMCFE. One million cubic feet of gas equivalent. Gas equivalents are determined
using the ratio of six Mcf of gas (including gas liquids) to one Bbl of oil.

MMBtu. One million British Thermal Units. A British Thermal Unit is the heat
required to raise the temperature of a one-pound mass of water one degree
Fahrenheit.

Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.

Net asset value per share. The result of the fair market value of total assets
less total liabilities, divided by the total number of outstanding shares of
common stock.

PV-10 value. The present value of estimated future gross revenue to be generated
from the production of estimated net proved reserves, net of estimated
production and future development costs, using prices and costs in effect as of
the date indicated (unless such prices or costs are subject to change pursuant
to contractual provisions), without giving effect to non-property related
expenses such as general and administrative expenses, debt service and future
income tax expenses or to depreciation, depletion and amortization, discounted
using an annual discount rate of 10%.

Productive well. A well that is producing oil or gas or that is capable of
production.

Proved developed reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.

                                       22


Proved undeveloped reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion.

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

Reserve life. Expressed in years, represents the estimated net proved reserves
at a specified date divided by forecasted production for the preceding 12-month
period.

Royalty. The interest paid to the owner of mineral rights expressed as a
percentage of gross income from oil and gas produced and sold unencumbered by
expenses.

Royalty interest. An interest in an oil and gas property entitling the owner to
shares of oil and gas production free of costs of exploration, development and
production. Royalty interests are approximate and are subject to adjustment.

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

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

ITEM 2.  PROPERTIES

Operations

         St. Mary's exploration, development and acquisition activities are
focused in five core operating areas: the Mid-Continent region; onshore Gulf
Coast and offshore Gulf of Mexico; the ArkLaTex region; the Rocky Mountain
region in Montana, North Dakota and Wyoming; and the Permian Basin in west Texas
and New Mexico. Information concerning each of our major areas of operations,
based on our estimated proved reserves as of December 31, 2002, is shown below.

                                                 Estimated Proved Reserves
                                         ----------------------------------------
                                                                       MMCFE                   PV-10 Value
                                           Oil        Gas      ------------------    ------------------------
                                         (MBbls)    (MMcf)      Amount    Percent    (In thousands)   Percent
                                         -------    -------    ------------------    ------------------------
 Mid-Continent Region...........           1,315    140,840    148,731      30.3%         $ 278,685     33.8%
 ArkLaTex Region................           1,350     47,464     55,566      11.3%            91,458     11.1%
 Gulf Coast and Gulf of Mexico..             400     37,505     39,906       8.1%           103,128     12.5%
 Rocky Mountain Region..........          27,422     35,568    200,096      40.8%           284,482     34.5%
 Permian Basin..................           5,632     12,795     46,588       9.5%            67,055      8.1%
                                         -------    -------    -------    -------    --------------   -------
 Total..........................          36,119    274,172    490,887     100.0%         $ 824,808    100.0%
                                         =======    =======    =======    =======    ==============   =======

         Mid-Continent Region. Since 1973 St. Mary has been active in the
Mid-Continent region, where operations are managed by our 32-person Tulsa,
Oklahoma office. We have ongoing exploration and development programs in the
Anadarko and Arkoma Basins of Oklahoma and Texas. The Mid-Continent region
accounted for 30% of our estimated proved reserves as of December 31, 2002, or


                                       23


148.7 BCFE, 84% of which were proved developed and 95% of which were natural
gas. We participated in drilling 50 gross wells in this region in 2002,
including 26 wells operated by us, 88% of which were completed as producers.

         St. Mary's development and exploration budget in the Mid-Continent
region for 2003 totals $45.0 million. We plan to operate 36 drilling wells in
the Mid-Continent region during 2003 and to utilize three to four drilling rigs
throughout the year. Our 2003 budget also reflects participation in an
additional 10 to 30 wells to be operated by other entities.

         Anadarko Basin. Our long history of operations and proprietary geologic
knowledge enables us to sustain economic development and exploration programs
despite periods of adverse industry conditions. We are applying state of the art
technology in hydraulic fracturing and innovative well completion techniques to
accelerate production and associated cash flow from the region's tight gas
reservoirs. We also continue to benefit from the continuing consolidation of
operators in the basin as we pursue attractive opportunities to acquire
properties.

         Approximately 55% of the drilling activities for 2003 will be focused
on low-to-medium-risk development in the Cromwell, Granite Wash, Osborne, Red
Fork and Spiro formations. In addition, approximately 45% of our 2003
Mid-Continent capital budget is allocated to deeper, higher-potential wells in
the Morrow and Atoka formations at the NE Mayfield Field in Oklahoma and in
various other fields within the Morrow and Springer formations at depths up to
22,000 feet.

         Carrier Prospect. Within its inventory of higher-risk higher-potential
exploration prospects, St. Mary holds an aggregate 42% working interest in 5,700
acres in Leon County, Texas. Our Carrier Prospect acreage relates to a platform
reef prospect located near the industry's prolific Cotton Valley pinnacle reef
discovery and targets potentially larger platform reefs that we believe
developed in the deeper waters of the basin during the Jurassic period. We plan
to seek industry participation for an initial test well in 2003.

         Arkoma Basin. In February 2002 we expanded our Arkoma Basin holdings
with the acquisition of oil and gas properties and an 89-mile gas gathering
system from Merchant Resources #1 L.P. of Houston, Texas for $7.5 million. The
properties include undrilled locations and are expected to complement our
existing properties in the area. In 2002, we spud 11 wells in this area with an
82% success rate. The primary producing formations in this area include the
Booch, Hartshorne, Wapanucka and the Cromwell. Our average working interest for
these wells is 91%, and we anticipate drilling at least ten gross wells in this
area in 2002. Initial production rates from the wells have varied from
approximately 500 Mcf per day to 1,250 Mcf per day. Since the Merchant
acquisition we have increased production in this area from two MMcf per day to
nearly eight MMcf per day.

         Gulf Coast and Gulf of Mexico Region. St. Mary's presence in south
Louisiana dates to the early 1900's when our founders acquired a franchise
property in St. Mary Parish on the shoreline of the Gulf of Mexico. These 24,900
acres of fee lands yielded $2.9 million of gross oil and gas royalty revenue in
2002. Our onshore Gulf Coast and Gulf of Mexico presence increased significantly
in 1999 with the acquisition of King Ranch Energy. This acquisition included
260,000 gross undeveloped acres (81,000 net acres) and a large 3-D seismic
database. The Gulf Coast and Gulf of Mexico region accounted for 8% of our
estimated proved reserves as of December 31, 2002, or 39.9 BCFE, 95% of which
were proved developed and 94% of which were natural gas.

                                       24


         St. Mary's diverse activities in the onshore Gulf Coast and Gulf of
Mexico are managed by our 13-person regional office in Lafayette, Louisiana and
include ongoing development and exploitation programs in multiple basins onshore
south Louisiana as well as several offshore shallow-water Gulf of Mexico blocks.
Advanced 3-D seismic imaging and interpretation techniques and extensive
subsurface geological interpretations are revitalizing exploration and
development activities in the Miocene trend along the Gulf Coast. Our
exploration and development budget in the Gulf Coast and Gulf of Mexico region
for 2003 is $17.0 million.

         The Judge Digby Field is the largest field acquired in the King Ranch
Energy acquisition and is located outside Baton Rouge, Louisiana in Point Coupee
Parish. We have interests ranging from 10% to 20% in eleven wells that are
producing a total of 180 MMcf per day on a gross basis as of February 2003. This
ultra deep field produces from multiple Tuscaloosa reservoirs between 19,000 and
24,000 feet. The wells are characterized by high producing rates such as the
Parlange #11 completed in 2000 at an initial rate of 92,000 Mcf per day. We
believe this well had the highest initial production rate for a well ever
completed onshore Louisiana. New drilling in this field is continuing with the
completion of the J. Wuertele #3 in August 2002 with producing rates up to
60,000 Mcf per day. The Majors #4 was drilled to 22,962 feet and completed in
December 2002 in the C-3 and C-4 Tuscaloosa sands producing at initial rates up
to 36,000 Mcf per day. Two new wells and two sidetrack wells are planned for
2003 along with several recompletions in this multi-pay geologically complex
field.

         In December 2002 we acquired additional interests in the High Island
Field where we drilled the successful Miami Corp T-1 well in 2001. This well is
currently producing 8,500 Mcf per day and we plan to drill an offset well in
2003.

         Fee Lands. St. Mary owns 24,900 acres of fee lands and associated
mineral rights in St. Mary Parish located approximately 85 miles southwest of
New Orleans, Louisiana. Since the initial discovery on our fee lands in 1938,
our cumulative oil and gas revenues, primarily landowner's royalties, from the
Bayou Sale, Horseshoe Bayou and Belle Isle fields have exceeded $235 million. We
currently lease 9,945 acres and have granted a seismic option to Seismic
Exchange, Inc. on the remaining 14,969 acres. The survey is underway and will
cover the entire fee properties. SEI estimates the acquisition of the data to be
completed by mid-October. Under the terms of the agreement, we are entitled to
receive a copy of the processed data and have been granted the right to utilize
the data for our purpose or for purposes of showing the data to current lessees
and prospective lessees. Upon completion of the processing of the survey data,
we are hopeful this will encourage development drilling by our lessees,
facilitate the origination of new prospects and stimulate exploration interest
in deeper, untested horizons. Our principal operators on the fee properties are
BP Amoco, Cabot and Amerada Hess

         ArkLaTex Region. St. Mary's operations in the ArkLaTex region are
managed by our 18-person office in Shreveport, Louisiana. The ArkLaTex region
accounted for 11% of our estimated proved reserves as of December 31, 2002, or
55.6 BCFE, 75% of which were proved developed and 85% of which were natural gas.
In 1992, we acquired oil and gas properties and rights to over 6,000 square
miles of proprietary 2-D seismic data in the region. Much of the Shreveport
office's successful exploration and development programs have derived from niche
acquisitions completed since 1992 totaling $23.2 million. These acquisitions
have provided access to strategic holdings of undeveloped acreage and
proprietary packages of geologic and seismic data, resulting in an active
program of additional development and exploration.

         Our holdings in the ArkLaTex region are comprised of interests in
approximately 701 producing gross wells, including 117 wells operated by us;
interests in leases totaling approximately 77,158 gross acres; and mineral

                                       25


servitudes totaling approximately 14,600 gross acres. Activities in the ArkLaTex
region during 2002 focused on the search for new opportunities and potential
analog fields as well as final development of several important field
discoveries made by our geoscientists since 1994. We completed two acquisitions
totaling $4.9 million for primarily undeveloped properties in the Huxley Field,
part of the James Lime Horizontal Trend. Our initial well, the USA N No. 2-H was
completed in early 2003 at a rate of 3,800 Mcf per day. We have six additional
wells planned in the Huxley Field in 2003.

         In 2003 we will continue to focus on the search for new opportunities
and potential analog fields in which to apply our proprietary geologic models
and production techniques. We anticipate participating in 35 gross wells in the
ArkLaTex region and are the operator of properties representing approximately
85% of our 2003 ArkLaTex region capital expenditures budget.

         Rocky Mountain Region. Nance Petroleum Corporation, a wholly owned
subsidiary of St. Mary, has conducted operations in the Williston Basin in
eastern Montana and western North Dakota on our behalf since 1991, initially
under a joint venture arrangement and subsequently as a wholly owned subsidiary.
This area has expanded into the Green River Basin with properties acquired from
Choctaw and Flying J and the Powder River Basin with our coal-bed methane pilot
project and additional properties acquired from Flying J in 2003. The Rocky
Mountain region accounted for 41% of our estimated proved reserves as of
December 31, 2002, or 200.1 BCFE, 96% of which were proved developed and 82% of
which were oil.

         Our office in Billings, Montana includes a 35-person staff. A
significant portion of the exploration and development in the Rocky Mountain
Region is based on the interpretation of 3-D seismic data. We have successfully
used 3-D seismic imaging to delineate structure and porosity development in the
Red River formation. Since 1991 we have successfully completed 34 out of 38
gross wells drilled and operated. Our prospect inventory continues to expand as
results from current activity lead to additional areas to conduct 3-D seismic
surveys. Ten additional 3-D surveys are planned for 2003.

         St. Mary spent $17 million on exploration and development in the
Williston Basin in 2002. In December 2002 we completed a $69.5 million
acquisition of Williston Basin properties from Burlington Resources. These
properties currently produce approximately 3,100 barrels of oil and 3,300 Mcf of
gas per day. Our 2003 Rocky Mountain Region exploration and development capital
budget is $33.0 million. We plan to drill seventeen operated wells with working
interests ranging from 48% to 100%. We are the operator of properties
representing approximately 86% of our Rocky Mountain Region capital budget in
2003.

         In January 2003 St. Mary issued 3,380,818 shares of its restricted
common stock valued at $71.6 million to acquire Rocky Mountain properties from
Flying J Oil & Gas Inc. and Big West Oil & Gas Inc. This acquisition
included properties located in the Williston, Powder River and Green River
Basins with 66.9 BCFE of proved reserves and production of approximately 2,100
barrels of oil and 8,200 Mcf of gas per day. We also received a net amount of
$2.8 million in cash for normal purchase price adjustments. In addition, St.
Mary made a non-recourse loan to Flying J and Big West of $71.6 million at LIBOR
plus 2% for up to a 39-month period, which is secured by a pledge of the shares
of St. Mary stock issued to Flying J and Big West. The loan was funded through
borrowings under our bank credit facility.

         Permian Basin Region. The Permian Basin area covers a significant
portion of eastern New Mexico and western Texas and is one of the major
producing basins in the United States. The basin includes hundreds of oil fields

                                       26


undergoing secondary and enhanced oil recovery projects. 3-D seismic imaging of
existing fields and advanced secondary recovery programs are substantially
increasing oil recoveries in the Permian Basin. Our holdings in the Permian
Basin resulted from a series of niche property acquisitions since 1995, which
total $22.1 million. We believe that our Permian Basin operations provide us
with a solid base of long-lived oil reserves, promising longer-term exploration
and development prospects and the potential for secondary recovery projects. The
Permian Basin region accounted for 9.5% of our estimated proved reserves as of
December 31, 2002, or 46.6 BCFE, of which 73% were proved developed and 73% were
oil.

         St. Mary participated in drilling 15 gross wells in 2002 with an 80%
success rate. The East Shugart Delaware Unit waterflood project was initiated in
2000 with a 5-well pilot project. Production flattened out in 2002 and the
initial response from the water injection is anticipated in 2003. We are hopeful
the East Shugart waterflood will be an analog to our successful Parkway Delaware
Unit waterflood that increased production from 325 Bbl per day in 1996 when the
property was acquired to 1,200 Bbl per day in 2002.

         Our Permian Basin capital budget for 2002 is $12.0 million. In addition
to drilling four injection wells in the East Shugart Delaware waterflood, two
wells are planned at our Samboca prospect, six in-fill wells are planned at Ft.
Chadbourne and three wells in the Parkway and HJSA fields.

         Other Areas. We have acquired leases covering 145,000 gross acres in
which we own an average 90% working interest in the Hanging Woman Basin of
Montana and Wyoming for prospective coalbed methane development. We have drilled
an 18-well pilot program and are evaluating its results. We are also currently
investigating permitting and environmental issues related to these prospects. We
will be unable to determine the future potential of these prospects until we
have completed the evaluation of our pilot program and have resolved all such
permitting and environmental issues. An environmental public interest group has
filed a lawsuit against the federal Bureau of Land Management seeking to cancel
certain federal leases related to coalbed methane development in Montana, which
could affect 48,000 of our 145,000 gross leased acres. We will monitor this
lawsuit as part of our investigation of environmental issues related to these
prospects. See "Legal Proceedings" for a discussion of this lawsuit.

         On April 26, 2002, the Interior Board of Land Appeals of the U.S.
Department of the Interior issued an order that reversed a decision by the
Bureau of Land Management dismissing a protest by the Wyoming Outdoor Council
and Powder River Basin Resource Council of the offer for sale in February 2000
of three oil and gas leases in the Powder River Basin in Wyoming. The Board held
that the BLM determination to allow the offer for sale of the three particular
leases did not comply with environmental laws since the environmental analysis
used by the BLM in making that determination did not contain a discussion of the
unique potential impacts associated with coalbed methane extraction and
development or consider reasonable alternatives relevant to a pre-leasing
environmental analysis. On October 15, 2002, the Board refused to reconsider
this lease holding. The order addressed only three particular leases covering
approximately 2,600 acres that are not included in our Hanging Woman Basin
project. However, we cannot assure you that other leases, including issued
leases that we hold in the Hanging Woman Basin, will not be challenged on a
similar basis.

         Coalbed methane production is similar to our traditional natural gas
production as to the physical producing facilities and the product produced.
However, the subsurface mechanisms that allow the gas to move to the wellbore
and the producing characteristics of coalbed methane wells are very different
from traditional natural gas production. Unlike conventional gas wells, which

                                       27


require a porous and permeable reservoir, hydrocarbon migration and a natural
structural and/or stratigraphic trap, the coalbed methane gas is trapped in the
molecular structure of the coal itself until released by pressure changes
resulting from the removal of in situ water. Frequently, coalbeds are partly or
completely saturated with water. As the water is removed, internal pressures on
the coal are decreased, allowing the gas to desorb from the coal and flow to the
wellbore. Unlike traditional gas wells, new coalbed methane wells often produce
water for several months and then, as the water production decreases, natural
gas production increases as the coal seams de-water.

         Coalbed methane gas production in the Hanging Woman Basin requires
state permits for the use of well-site pits and evaporation ponds for the
disposal of produced water. However, groundwater produced from the coal seams
can generally be discharged into arroyos, surface waters, well-site pits and
evaporation ponds without a permit if it does not exceed surface discharge
permit levels, and if it meets state and federal primary drinking water
standards. All of these disposal options require an extensive third-party water
sampling and laboratory analysis program to ensure compliance with state permit
standards. Where water of lesser quality is involved or the wells produce water
in excess of the applicable volumetric permit limits, additional disposal wells
would have to be drilled to re-inject the produced water back into deep
underground rock formations.

         Duchesne Deep. In 2002 we acquired over 12,000 acres in the Uinta Basin
of Utah to drill a basin centered gas test in the Mesaverde formation at depths
up to 16,000 feet. Using current technology and our experience drilling and
completing tight gas sand formations, our objective is to economically produce
gas from the tight Mesaverde sand. The first well was spud in September 2002 and
reached total depth in early 2003. The well will undergo extensive testing and
if successful, $4.8 million is budgeted in 2003 for additional acreage and to
drill two additional wells.

Acquisitions

         In December 2002 we completed a $69.5 million acquisition of Williston
Basin properties from Burlington Resources Oil and Gas Company LP. Other
acquisitions in 2002 totaled $18.2 million including the $7.5 million
acquisition of Arkoma Basin, Oklahoma properties from Merchant Resources LP and
the $4.9 Huxley Field acquisition in east Texas. In November 2001, we completed
a $40.5 million acquisition from Choctaw II Oil & Gas, Ltd. of oil and gas
properties located in our Williston Basin core area and the Green River Basin in
Wyoming. During the last five years we have completed over $232 million of
acquisitions. For 2003 we have budgeted $90.0 million for property acquisitions.
However, we have the financial capacity to commit substantially greater
resources to purchases should additional opportunities be identified. In January
2003 we closed a $68.8 million acquisition of Rocky Mountain properties from
Flying J Oil & Gas Inc. and Big West Oil & Gas Inc., after purchase price
adjustments. This acquisition included 66.9 BCFE of proved reserves located in
the Williston, Powder River and Green River Basins. In January 2003 we also
closed a $5.2 million acquisition of interests in our Ft. Chadbourne field in
west Texas.

Reserves

         The following table presents summary information with respect to the
estimates of our proved oil and gas reserves for each of the years in the
three-year period ended December 31, 2002, as prepared by both Ryder Scott
Company, independent petroleum engineers, and us. For the periods presented,
Ryder Scott Company evaluated properties representing approximately 80% of our

                                       28


total PV-10 value while we evaluated the remainder. The PV-10 values shown in
the following table are not intended to represent the current market value of
the estimated proved oil and gas reserves owned by St. Mary. Neither prices nor
costs have been escalated, but prices include the effects of hedging contracts.
You should read the following table along with the sections entitled "Risk
Factors - Risks Related to Our Business - Information concerning our reserves
and future net revenue estimates is uncertain".


                                                    As of December 31,
                                            --------------------------------
                                            2002         2001           2000
                                            ----         ----           ----
Proved Reserves Data:
Oil (MBbls)                               36,119       23,669         20,950
Gas (MMcf)                               274,172      241,231        225,975
MMCFE                                    490,887      383,247        351,673
PV-10 value (in thousands) (1)         $ 824,808    $ 363,795    $ 1,153,663
Proved Developed Reserves                    88%          86%            87%
Production Replacement                      306%         166%           168%
Reserve Life (years) (2)                     8.9          7.1            6.7
- ------------------

(1)      PV-10 value as of December 31, 2002, was calculated using prices in
         effect at December 31, 2002, of $31.20 per barrel of oil (NYMEX) and
         $4.74 per MMBtu of gas (Gulf Coast spot price). Both of these prices
         were then adjusted for transportation, quality and basis differentials.
         These prices were 57% and 79% higher, respectively, than prices used to
         calculate PV-10 value as of December 31, 2001. The PV-10 value includes
         a deficit totaling $23,398,000 attributable to price hedging contracts.
(2)      Reserve life represents the estimated proved reserves at the dates
         indicated divided by actual production for the preceding 12-month
         period.

Production

         The following table summarizes the average volumes of oil and gas
produced from properties in which St. Mary held an interest during the periods
indicated:
                                                     Years Ended December 31,
                                                  ------------------------------
                                                     2002       2001        2000
                                                     ----       ----        ----
  Operating Data:
  Net production:
   Oil (MBbls)................................      2,815      2,434       2,398
   Gas (MMcf).................................     38,164     39,491      38,346
   MMCFE......................................     55,055     54,093      52,731
  Average net daily production:
   Oil (Bbls).................................      7,713      6,667       6,551
   Gas (Mcf)..................................    104,558    108,195     104,769
   MCFE.......................................    150,836    148,199     144,075
  Average sales price (1):
   Oil (per Bbl)..............................    $ 25.34    $ 23.29     $ 23.53
   Gas (per Mcf)..............................    $  3.00    $  3.73     $  3.44
  Additional per MCFE data:
   Lease operating expense....................    $  0.66    $  0.75     $  0.48
   Transportation costs.......................    $  0.06    $  0.04     $  0.04
   Production taxes...........................    $  0.20    $  0.23     $  0.21
   General and administrative.................    $  0.26    $  0.22     $  0.21
   Depreciation, depletion and amortization...    $  0.99    $  0.95     $  0.76
 -----------------
(1)  Includes the effects of St. Mary's hedging activities. See "Management's
     Discussion and Analysis of Financial Condition and Results of Operations."

                                       29


Productive Wells

         As of December 31, 2002, we had interests in 1,256 gross (558 net)
productive oil wells and 1,457 gross (334 net) productive gas wells. Productive
wells are either producing wells or wells capable of commercial production
although currently shut in. One or more completions in the same wellbore are
counted as one well. A well is categorized under state reporting regulations as
an oil well or a gas well based upon the ratio of gas to oil produced when it
first commenced production, and such designation may not be indicative of
current production.

Drilling Activity

         The following table sets forth the wells drilled and recompleted in
which St. Mary participated during each of the three years indicated:

                                              Years Ended December 31,
                             ---------------------------------------------------
                                   2002              2001              2000
                             ---------------   ---------------   ---------------
                              Gross      Net    Gross      Net    Gross      Net
                              -----      ---    -----      ---    -----      ---
   Development:
    Oil.....................     26    11.52       48    14.49       40    17.37
    Gas.....................    103    38.89      154    33.28      107    24.94
    Non-productive..........     27    14.42       31     7.13       31     9.38
                                ---    -----      ---    -----      ---    -----
                                156    64.83      233    54.90      178    51.69
                                ---    -----      ---    -----      ---    -----
   Exploratory:
    Oil.....................      3     1.22        3     1.55        6     4.17
    Gas.....................      1      .10        9     1.84       11     3.63
    Non-productive..........      8     2.64        7     2.56        8     4.32
                                ---    -----      ---    -----      ---    -----
                                 12     3.96       19     5.95       25    12.12
                                ---    -----      ---    -----      ---    -----

   Farmout or non-consent...      8        -        9        -        8        -
                                ---    -----      ---    -----      ---    -----

   Total (1) ...............    176    68.79      261    60.85      211    63.81
                                ===    =====      ===    =====      ===    =====

   ---------------------------

   (1)      Does not include 14, 12 and 12 gross wells completed on St.
            Mary's fee lands during 2002, 2001 and 2000, respectively, in
            which we have only a royalty interest.

         All of our drilling activities are conducted on a contract basis with
independent drilling contractors. We do not own any drilling equipment.

                                       30


Acreage

         The following table sets forth the gross and net acres of developed and
undeveloped oil and gas leases, fee properties, mineral servitudes and lease
options held by St. Mary as of December 31, 2002. Undeveloped acreage includes
leasehold interests that may already have been classified as containing proved
undeveloped reserves.


                                         Developed Acres (1)   Undeveloped Acres (2)           Total
                                         -------------------   ---------------------   -------------------
                                           Gross        Net       Gross        Net       Gross       Net
                                           -----        ---       -----        ---       -----       ---
Arkansas............................       2,256        399         166         28       2,422       427
 Louisiana..........................      90,574     33,075      25,709     10,381     116,283    43,456
 Montana............................      57,732     28,630     174,923    139,410     232,655   168,040
 New Mexico.........................       7,160      2,151       1,320        920       8,480     3,071
 North Dakota.......................      93,362     36,780      95,999     61,064     189,361    97,844
 Oklahoma...........................     231,147     60,633      43,661     20,163     274,808    80,796
 Texas..............................     138,304     49,155      92,941     35,735     231,245    84,890
 Wyoming............................      17,598      6,277      56,689     48,942      74,287    55,219
 Other (3) .........................       2,501        346      13,465      8,647      15,966     8,993
                                         -------    -------     -------    -------   ---------   -------
                                         640,634    217,446     504,873    325,290   1,145,507   542,736
                                         -------    -------     -------    -------   ---------   -------

Louisiana Fee Properties............      10,337     10,337      14,577     14,577      24,914    24,914
Louisiana Mineral Servitudes........       9,785      5,346       4,768      4,255      14,553     9,601
                                         -------    -------     -------    -------   ---------   -------
                                          20,122     15,683      19,345     18,832      39,467    34,515
                                         -------    -------     -------    -------   ---------   -------

   Total ...........................     660,756    233,129     524,218    344,122   1,184,974   577,251
                                         =======    =======     =======    =======   =========   =======

     -----------
     (1) Developed acreage is acreage assigned to producing wells for the
         spacing unit of the producing formation. Developed acreage in certain
         of St. Mary's properties that include multiple formations with
         different well spacing requirements may be considered undeveloped for
         certain formations, but have only been included as developed acreage in
         the presentation above.
     (2) Undeveloped acreage is lease acreage on which wells have not been
         drilled or completed to a point that would permit the production of
         commercial quantities of oil and gas regardless of whether such acreage
         contains estimated proved reserves.
     (3) Includes interests in Alabama, Colorado, Kansas, Mississippi, South
         Dakota, Utah and Washington. St. Mary also holds an overriding royalty
         interest in an additional 43,108 gross acres in Utah.


                                       31


ITEM 3.  LEGAL PROCEEDINGS

         From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of this date,
no legal proceedings are pending against us that individually or collectively
could have a material adverse effect upon our financial condition or results of
operations.

         On March 27, 2002, Nance Petroleum Corporation, a wholly owned
subsidiary, was named along with several other leaseholders and interested
parties as an additional co-defendant in a lawsuit that was originally filed in
the U.S. District Court for the District of Montana on June 12, 2001. The
plaintiff, the Northern Plains Resource Council, Inc. ("NPRC"), an environmental
public interest group, sued the U.S. Bureau of Land Management, the U.S.
Secretary of the Interior, the Montana BLM State Director and Fidelity
Exploration & Production Company. The lawsuit, which was reported in our 2001
Form 10-K and our 2002 Form 10-Qs, seeks the cancellation of all federal leases
related to coalbed methane development in Montana issued by the BLM since
January 1, 1997. This cancellation is sought primarily on the grounds of an
alleged failure of the BLM to comply with federal environmental laws. NPRC
alleges that the environmental impacts of coalbed methane development were not
properly analyzed before the challenged leases were issued. The Montana portion
of our Hanging Woman Basin coalbed methane project contains approximately 71,000
total net acres. The lawsuit potentially affects the approximately 47,000 net
acres that are subject to federal leases. Based on information presently
available, we believe that the BLM complied with the applicable environmental
laws. Nevertheless, there is no assurance as to the outcome of the lawsuit, and
therefore, there is no assurance that it will not adversely affect our coalbed
methane project. Even if the federal leases in Montana become unavailable, we
anticipate continuing with the Hanging Woman Basin project in Wyoming, and
obtaining additional non-federal leases in Montana. See "Properties - Other
Areas" for a discussion of other recent coalbed methane legal developments.

         As previously reported in our 2002 Quarterly Reports on Form 10-Q, GNK
Acquisition Corp., a recently acquired wholly owned subsidiary, was served in a
lawsuit on May 1, 2002, that had been filed earlier in 2002 in the District
Court in Shelby County, Texas. This suit was filed by Samson Lone Star Limited
Partnership against GNK Acquisition Corp. and GNK, Inc., the previous owner of
GNK Acquisition Corp. This suit was settled and dismissed in February 2003 with
no material effect on our financial position or results of operations.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of 2002.

                                       32


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

         The following table sets forth the names, ages and positions held by
St. Mary's executive officers as of January 31, 2003.

Name                          Age          Position
- ----                          ---          --------

Mark A. Hellerstein           50           Chairman of the Board, President
                                           and Chief Executive Officer
Ronald D. Boone               55           Executive Vice President and Chief
                                           Operating Officer
Robert L. Nance               66           Senior Vice President, and President
                                           of Nance Petroleum Corporation, a
                                           wholly-owned subsidiary of St. Mary
                                           since 1999
Robert T. Hanley              56           Vice President - Business Development
Richard C. Norris             47           Vice President - Finance, Secretary
                                           and Treasurer
Milam Randolph Pharo          50           Vice President - Land and Legal
Garry A. Wilkening            52           Vice President - Administration and
                                           Controller
Douglas W. York               41           Vice President - Acquisitions and
                                           Engineering

         Each of the executive officers has held the above positions for the
past five years, with the exception of the following:

         Mark A. Hellerstein was appointed Chairman of the Board in September
2002.

         Robert L. Nance has served as Senior Vice President of St. Mary since
2001.

         Robert T. Hanley has served as Vice President - Business Development
since 2000. Mr. Hanley was Chief Financial Officer of Nance Petroleum
Corporation from 1999 to 2000 and Chief Financial Officer of Panterra Petroleum,
a partnership between St. Mary and Nance Petroleum Corporation, from 1992 to
1999.

         Richard C. Norris has served as Vice President - Finance and Secretary
since 1999. Mr. Norris was appointed Treasurer in 1991, and from 1991 to 1999 he
was also Vice President - Accounting and Administration. Mr. Norris joined St.
Mary in 1982 as Corporate Controller.

         Milam Randolph Pharo has served as Vice President - Land and Legal
since 1998. Mr. Pharo joined St. Mary in 1996 as Vice President - Land and was
previously in private practice as an attorney specializing in oil and gas
matters since 1977.

         Garry A. Wilkening has served as Vice President - Administration since
1999. Mr. Wilkening joined St. Mary in 1993 as Corporate Controller.

         The executive officers of the Company serve at the pleasure of the
board of directors and do not have fixed terms. Executive officers generally are
elected at the regular meeting of the board immediately following the annual
stockholders meeting. Any officer or agent elected or appointed by the board may


                                       33


be removed by the board whenever in its judgement the best interests of the
Company will be served thereby without prejudice, subject however, to
contractual rights, if any, of the person so removed. Messrs. Hellerstein, Boone
and Nance are members of the board of directors.

         There are no family relationships, first cousin or closer, between any
executive officer and director. There are no arrangements or understandings
between any officer and any other person pursuant to which that officer was
elected.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Market Information. St. Mary's common stock is currently traded on the
New York Stock Exchange under the symbol SM after transferring from the Nasdaq
on November 20, 2002. The range of high and low sales prices for the quarterly
periods in 2002 and 2001, as reported by the New York Stock Exchange after
November 19, 2002, and the Nasdaq National Market System before November 20,
2002, is set forth below:

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

                   December 31, 2002                   $27.35          $23.16
                   September 30, 2002                   24.71           19.00
                   June 30, 2002                        25.05           21.00
                   March 31, 2002                       23.25           18.75

                   December 31, 2001                   $22.20          $14.65
                   September 30, 2001                   21.81           14.58
                   June 30, 2001                        25.24           19.25
                   March 31, 2001                       35.00           20.63


         Holders. As of February 28, 2003, the number of record holders of St.
Mary's common stock was 173. Management believes, after inquiry, that the number
of beneficial owners of our common stock is in excess of 3,700.

         Dividends. St. Mary has paid cash dividends to stockholders every year
since 1940. Annual dividends of $0.10 per share were paid in each of the years
1998 through 2002. We expect that our practice of paying dividends on our common
stock will continue, although the payment of future dividends on our common
stock will continue to depend on our earnings, capital requirements, financial
condition and other factors. In addition, the payment of dividends is subject to
covenants in our bank credit facility, including the requirement that we
maintain certain levels of stockholders' equity. Dividends are currently paid on
a semi-annual basis. Dividends paid totaled $2,787,000 in 2002 and $2,795,000 in
2001.

         Restricted Shares. On January 29, 2003, St. Mary issued 3,380,818
restricted shares of our common stock in connection with the acquisition of oil
and gas properties from Flying J Oil & Gas Inc. and Big West Oil & Gas
Inc. The shares are subject to contractual restrictions on transfer for a period
of two years and St. Mary will be required to file a registration statement for
the resale of the shares and have it declared effective upon the expiration of
the two-year period.

                                       34


         Equity Compensation Plans. St. Mary has a stock option plan, an
incentive stock option plan and an employee stock purchase plan under which
options and shares of St. Mary common stock are authorized for grant or issuance
as compensation to eligible employees, consultants and members of the board of
directors. Each of these plans has been approved by our stockholders. See Note 7
of the Notes to Consolidated Financial Statements included in this report for
further information about the material terms of these plans. The following table
is a summary of the shares of common stock authorized for issuance under our
equity compensation plans as of December 31, 2002:

                                        ( a )                  ( b )                  ( c )

                                                                                      Number of securities
                                        Number of securities                          remaining available for
                                        to be issued upon      Weighted-average       future issuance under
                                        exercise of            exercise price of      equity compensation plans
                                        outstanding options,   outstanding options,   (excluding securities
Plan Category                           warrants and rights    warrants and rights    reflected in column (a))
- ----------------------------------      --------------------   --------------------   -------------------------

Equity compensation plans approved
by security holders                                3,061,566                 $21.34                   1,118,588(1)

Equity compensation plans not
approved by security holders                            -                      -                           -
                                        --------------------   --------------------   -------------------------

Total                                              3,061,566                 $21.34                   1,118,588
                                        ====================   ====================   =========================

- --------------
    (1)      Includes 870,073 shares which are authorized for issuance
             under our employee stock purchase plan.


                                       35


ITEM 6.  SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data for St. Mary
as of the dates and for the periods indicated. The financial data for each of
the five years presented were derived from the consolidated financial statements
of St. Mary. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
includes a discussion of factors materially affecting the comparability of the
information presented, and in conjunction with St. Mary's consolidated financial
statements included elsewhere in this report.
                                                                       Years Ended December 31,
                                               ------------------------------------------------------

                                                  2002       2001       2000       1999       1998
                                               ---------- ---------- ---------- ---------- ----------
                                                        (In thousands, except per share data)
Income Statement Data:
Operating revenues:
   Oil and gas production                       $ 185,670  $ 203,973  $ 188,407  $  73,387  $  71,413
   Gas marketing revenue                            8,399        420          -          -          -
   Gain (loss) on sale of proved
     properties                                    (2,633)       367      3,404        (55)     7,685
   Derivative gain                                  3,188          -          -          -          -
   Other                                            1,770      2,709      3,855      1,582        411
                                               ---------- ---------- ---------- ---------- ----------
Total operating revenues                          196,394    207,469    195,666     74,914     79,509
                                               ---------- ---------- ---------- ---------- ----------

Operating expenses:
   Oil and gas production                          50,839     55,000     38,461     19,574     17,770
   Depletion, depreciation &
     amortization                                  54,432     51,346     40,129     22,574     24,912
   Exploration                                     19,501     19,518      9,633     11,593     11,705
   Impairment of proved properties                      -        820      4,449      3,982     17,483
   Abandonment and impairment of
         unproved properties                        2,446      3,865      1,841      6,616      4,457
   General and administrative                      14,299     11,762     11,166      9,172      7,097
   Gas marketing expense                            7,982        420          -          -          -
   Derivative loss                                      -       1573          -          -          -
   Other                                            1,206      1,253      1,437      1,802      9,304
                                               ---------- ---------- ---------- ---------- ----------
Total operating expenses                          150,705    145,557    107,116     75,313     92,728
                                               ---------- ---------- ---------- ---------- ----------

Income (loss) from operations                      45,689     61,912     88,550       (399)   (13,219)
   Non-operating (expense) income                  (3,110)       376        737         75     (1,027)
   Income tax (expense) benefit                   (15,019)   (21,829)   (33,667)       406      5,415
                                               ---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations           27,560     40,459     55,620         82     (8,831)
Gain on sale of discontinued operations,
  net of income taxes                                   -          -          -          -         34
                                               ---------- ---------- ---------- ---------- ----------
Net income (loss)                               $  27,560  $  40,459  $  55,620  $      82  $  (8,797)
                                               ========== ========== ========== ========== ==========

Basic net income (loss) per common share        $    0.99  $    1.45  $    2.00  $       -  $   (0.40)
                                               ========== ========== ========== ========== ==========
Diluted net income (loss) per common share      $    0.97  $    1.42  $    1.97  $       -  $   (0.40)
                                               ========== ========== ========== ========== ==========


Cash dividends per share                        $    0.10  $    0.10  $    0.10  $    0.10  $    0.10
Basic weighted average common shares
  outstanding                                      27,856     27,973     27,781     22,198     21,874
Diluted weighted average common shares
  outstanding                                      28,391     28,555     28,271     22,329     21,874

                                       36


                                                              Years Ended December 31,
                                                              ------------------------
                                                   2002      2001       2000       1999       1998
                                                   ----      ----       ----       ----       ----
                                                              (In thousands, except per share data)
Balance Sheet Data (end of period):
Working capital                                 $   2,050  $  34,000  $  40,639  $  13,440  $   9,785
Net property and equipment                        471,939    358,930    252,411    180,664    143,825
Total assets                                      537,139    436,989    321,895    230,438    184,497
Long-term obligations                             113,601     64,000     22,000     13,000     19,398
Total stockholders' equity                        299,513    286,117    250,136    188,772    134,742

Other Data:
Discretionary cash flow (1)                     $ 118,762  $ 141,278  $ 132,947  $  43,984  $  44,332
Net Cash provided by (used in):
   Operating activities                           141,709    127,492     92,267     40,755     45,386
   Investing activities                          (180,931)  (159,075)  (112,868)   (22,243)   (36,982)
   Financing activities                            46,260     29,080     13,025    (12,138)    (7,695)
Capital and exploration expenditures, cash
     and noncash                                  192,988    182,863    125,184     91,184     57,855
- ------------
    (1)  Discretionary cash flow is calculated as net income plus depreciation
         and amortization expense, exploration expense, deferred tax expense and
         unrealized derivative loss minus deferred tax benefit and unrealized
         derivative gain. Discretionary cash flow is presented since it is a
         financial measure widely used for St. Mary's industry, and management
         believes that it provides useful additional information for analysis of
         St. Mary's ability to satisfy capital expenditure expectations and debt
         service and working capital requirements. Discretionary cash flow
         should not be considered in isolation or as a substitute for net
         income, income from operations, cash flow provided by operating
         activities or other income or cash flow data prepared in accordance
         with generally accepted accounting principles or as a measure of a
         company's profitability or liquidity. As discretionary cash flow
         excludes some, but not all, items that affect net income and may vary
         among companies, the discretionary cash flow presented above may not be
         comparable to similarly titled measures of other companies. The
         following table provides a reconciliation of discretionary cash flow to
         net cash provided by operating activities for the periods presented.


         Following is a reconciliation of discretionary cash flow to cash
provided by operations:

                                                               Years Ended December 31,
                                               ------------------------------------------------------
                                                  2002       2001       2000       1999        1998
                                               ---------- ---------- ---------- ---------- ----------

 Discretionary cash flow                        $ 118,762  $ 141,278  $ 132,947   $ 43,984  $  44,332


 Writedown of investments                               -          -          -          -      8,502
 Loss (gain) on sales                               1,797       (367)    (5,560)        55     (7,685)
 Non-exploratory dry hole
   exploration expense                            (11,824)   (10,490)    (8,844)    (6,602)    (6,813)

 Minority interest & other                         40     (1,327)     1,260         29      1,039

 Changes in working capital                        32,934     (1,602)   (27,536)     3,289      6,011

                                               ---------- ---------- ---------- ---------- ----------
 Cash Flow from Operations                      $ 141,709  $ 127,492  $  92,267  $  40,755  $  45,386
                                               ========== ========== ========== ========== ==========

                                       37


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
         FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

         During the year ended December 31, 2002, the financial markets were
characterized by instability. At the same time some stability returned to the
oil and gas industry. The NYMEX gas price averaged $3.25 per MMBtu and oil
prices averaged $26.06 per barrel. Rig costs and operating costs decreased
slightly with after-hedge price realizations down 11%, cash costs plus DD&A flat
on an MCFE basis, production relatively flat and a $2.6 million pre-tax loss on
property sales compared to a $367,000 pre-tax gain in 2001, net income decreased
$14.2 million to $26.7 million. We replaced 305% of our 2002 production at a
finding cost of $1.15 per MCFE. This success was led by excellent drilling
results at the NE Mayfield field in Oklahoma. In December 2002 we acquired the
Williston Basin properties of Burlington Resources Oil & Gas Company LP for
$69.5 million in cash. In March 2002 we completed a private placement of $100.0
million of senior convertible notes.

         The industry enters 2003 with less than average gas in storage, cold
weather in the eastern half of the United States, a continuing petroleum
industry strike in Venezuela and the possibility of escalating conflict in the
Middle East. Rig and other service costs have remained moderate, and the rig
count has not increased to the extent predicted. Our financial condition is
excellent, and we have an outstanding inventory of prospects to be drilled. We
caution that higher gas prices may cause rig rates and operating costs to
increase in future months. Subject to uncertainties specified in our cautionary
statement about forward-looking statements, we project that results of
operations for 2003 should reflect higher revenues and higher net income.

Critical Accounting Policies and Estimates

         Our discussion of financial condition and results of operation is based
upon the information reported in our consolidated financial statements. The
preparation of these consolidated financial statements requires us to make
assumptions and estimates that affect the reported amounts of assets,
liabilities, revenues and expenses as well as the disclosure of contingent
assets and liabilities at the date of our financial statements. We base our
decisions on historical experience and various other sources that are believed
to be reasonable under the circumstances. Actual results may differ from the
estimates we calculated due to changing business conditions or unexpected
circumstances. Policies we believe are critical to understanding our business
operations and results of operations are detailed below. For additional
information on our significant accounting policies you should see Note 1 -
Summary of Significant Accounting Policies and Note 11 - Disclosures About Oil
and Gas Producing Activities in our accompanying consolidated financial
statements.

         Revenue recognition - We are engaged in the exploration, development,
         acquisition and production of natural gas and crude oil. Our revenue
         recognition policy is significant because revenue is a key component of
         our results of operations and our forward-looking statements contained
         in Liquidity and Capital Resources. We derive our revenue primarily
         from the sale of produced natural gas and crude oil. Revenue is
         recorded in the month our production is delivered to the purchaser, but
         payment is generally received between 30 and 90 days after the date of
         production. At the end of each month we make estimates of the amount of
         production delivered to the purchaser and the price we will receive. We
         use our knowledge of our properties, their historical performance, the
         anticipated effect of weather conditions during the month of
         production, NYMEX and local spot market prices and other factors as the


                                       38


         basis for these estimates. Variances between our estimates and the
         actual amounts received are recorded in the month payment is received.

          Crude oil and Natural Gas Hedging - Generally, our crude oil and
         natural gas hedging contracts will qualify for cash flow hedge
         accounting under Statement of Financial Accounting Standards No. 133,
         "Accounting for Derivative Instruments and Hedging Activities." This
         policy is significant because it affects the timing of revenue
         recognition in our statements of operations and is discussed
         prominently in our forward looking statements contained in Liquidity
         and Capital Resources. Under this accounting pronouncement a majority
         of the gain or loss from a contract qualifying as a cash flow hedge is
         recorded in the month the contract settles with the counterparty. We
         include this gain or loss in oil and gas production revenues. If our
         natural gas and crude oil hedge contracts did not qualify for hedge
         accounting treatment or we chose not to use this hedge accounting
         methodology, our periodic statements of operations could include
         significant changes in the estimate of non-cash derivative gain or loss
         due to swings in the value of these contracts. Consequently we would
         report a different amount for oil and gas production revenues in our
         statement of operations. These fluctuations could be especially
         significant in a volatile pricing environment such as we have
         encountered over the last three years.

         Oil and gas reserve quantities - Estimated reserve quantities and the
         related estimates of future net cash flows affect our periodic
         calculations of depletion, depreciation and impairment for our proved
         oil and gas properties. Proved oil and gas reserves are the estimated
         quantities of crude oil, natural gas and natural gas liquids which
         geological and engineering data demonstrate with reasonable certainty
         to be recoverable in future periods from known reservoirs under
         existing economic and operating conditions. Future cash inflows and
         future production and development costs are determined by applying
         benchmark prices and costs, including transportation, quality and basis
         differentials, in effect at the end of each period to the estimated
         quantities of oil and gas remaining to be produced at the end of that
         period. Expected cash flows are reduced to present value using a
         discount rate that depends upon the purpose for which the reserve
         estimates will be used. Reserve estimates are inherently imprecise, and
         estimates of new discoveries are more imprecise than those of proved
         producing oil and gas properties. We expect that periodic reserve
         estimates will change in the future as additional information becomes
         available or as oil and gas prices and operating and capital costs
         change. Changes in depletion, depreciation or impairment calculations
         caused by changes in reserve quantities or net cash flows are recorded
         in the period that the reserve estimates changed.

         Valuation of long-lived and intangible assets - Our property and
         equipment is recorded at cost. An impairment allowance is provided on
         unproved property when we determine that the property will not be
         developed. We evaluate the realizability of our proved producing and
         other long-lived assets whenever events or changes in circumstances
         indicate that an impairment may have occurred. Our impairment test
         compares the expected undiscounted future net revenues from a property,
         using escalated pricing with the related net capitalized costs of the
         property at the end of each period. When the net capitalized costs
         exceed the undiscounted future net revenue of a property, the cost of
         the property is written down to our estimate of fair value, which is
         determined by applying a 15% discount rate to future net revenues.
         Other companies have their own criteria for acceptable internal rates
         of return, which may differ from our criteria. Additionally, our
         criteria for an acceptable internal rate of return are subject to
         change over time. Different pricing assumptions or discount rates could
         result in a different calculated impairment.

                                       39


         Income taxes - We provide for deferred income taxes on the difference
         between the tax basis of an asset or liability and its carrying amount
         in our financial statements in accordance with Statement of Financial
         Accounting Standards No. 109, "Accounting for Income Taxes." This
         difference will result in taxable income or deductions in future years
         when the reported amount of the asset or liability is recovered or
         settled, respectively. Considerable judgment is required in determining
         when these events may occur and whether recovery of an asset is more
         likely than not. Additionally, our federal and state income tax returns
         are generally not filed before the consolidated financial statements
         are prepared, therefore we estimate the tax basis of our assets and
         liabilities at the end of each period as well as the effects of tax
         rate changes, tax credits and net operating loss carryforwards.
         Adjustments related to differences between the estimates we used and
         actual amounts we reported are recorded in the period in which we file
         our income tax returns. These adjustments and changes in our estimates
         of asset recovery could have a material impact on our results of
         operations.

         The remaining portion of Management's Discussion and Analysis contains
additional discussion of management and accounting policies that are relevant to
specific disclosures.

                                       40


Results of Operations

The following table sets forth selected operating data for the periods
indicated:

                                                              Years Ended December 31,
                                                         --------------------------------
                                                            2002       2001       2000
                                                            ----       ----       ----
                                                      (In thousands, except per volume data)
  Oil and gas production revenues:
     Gas production...................................    $ 114,334  $ 147,292  $ 131,979
     Oil production...................................       71,336     56,681     56,428
                                                         ---------- ---------- ----------
        Total.........................................    $ 185,670  $ 203,973  $ 188,407
                                                         ========== ========== ==========

  Net production:
     Gas (MMcf).......................................       38,164     39,491     38,346
     Oil (MBbls)......................................        2,815      2,434      2,398
     MMCFE............................................       55,055     54,093     52,731

  Average sales price (1):
     Gas (per Mcf)....................................    $    3.00  $    3.73  $    3.44
     Oil (per Bbl)....................................    $   25.34  $   23.29  $   23.53

  Oil and gas production costs:
     Lease operating expenses.........................      $36,472  $  40,505  $  25,567
     Transportation costs.............................        3,184      2,321      1,817
     Production taxes.................................       11,183     12,174     11,077
                                                         ---------- ---------- ----------
        Total.........................................    $  50,839  $  55,000  $  38,461
                                                         ========== ========== ==========

  Additional per MCFE data:
     Sales price (see Discussion under
       Accounting Matters)............................    $    3.37  $    3.77  $    3.57
     Lease operating expenses.........................        (0.66)     (0.75)     (0.48)
     Transportation costs.............................        (0.06)     (0.04)     (0.04)
     Production taxes.................................        (0.20)     (0.23)     (0.21)
                                                         ---------- ---------- ----------
        Operating margin..............................    $    2.45  $    2.75  $    2.84
                                                         ========== ========== ==========

     Depletion, depreciation and amortization.........    $    0.99  $    0.95  $    0.76
     Impairment of proved properties..................    $    0.00  $    0.02  $    0.08
     General and administrative.......................    $    0.26  $    0.22  $    0.21

     ---------------------
     (1) Includes the effects of the Company's hedging activities.


                                       41


2002 to 2001 Comparison

         Oil and Gas Production Revenues. Oil and gas production revenues
decreased $18.3 million, or 9% to $185.7 million in 2002 compared to $204.0
million in 2001. The following table presents the components of increases or
(decreases) between 2002 and 2001:

                                      Production       Price        Price
                                       % Change      $ Change     % Change
                                      ------------------------------------
         o        Natural Gas            (3%)       ($0.73)/Mcf      (20%)
         o        Oil                    16%         $2.05/Bbl         9%

         Projections of pricing for oil and gas lead us to believe that our
average realized price for both natural gas and oil will increase in 2003. We
also expect our acquisitions in late 2002 and early 2003 to cause a significant
increase in oil production in 2003. Average net daily production increased to a
new annual record of 150.8 MMCFE in 2002 compared to 148.2 MMCFE in 2001. Our
November 2001 acquisition from Choctaw II Oil & Gas, Ltd. added $13.7
million of revenue and average daily production of 11.2 MMCFE in 2002. Wells
completed in 2002 and our acquisitions added average net daily production of
19.7 MMCFE. These increases offset declines in average daily production from
older properties that include an average 5.8 MMCFE/day decline from the Judge
Digby field.

         St. Mary hedged approximately 53.9% or 1,518 MBbls of its oil
production for 2002 and realized a $1.9 million increase in oil revenue
attributable to hedging compared to a $1.9 million decrease in 2001. Without
these contracts we would have received an average price of $24.67 per Bbl in
2002 compared to $24.08 per Bbl in 2001. We also hedged 44.9% of our 2002 gas
production or 18.9 million MMBtu and realized a $4.1 million decrease in gas
revenue attributable to hedging compared to a $19.2 million decrease in gas
revenues in 2001. Without these contracts we would have received an average
price of $3.10 per Mcf for 2002 compared to $4.22 per Mcf in 2001. With the
contracts we currently have in place and the December 31, 2002, projections of
pricing for natural gas and crude oil in 2003, we project that we will record
decreases in both oil and gas revenues attributable to hedging in 2003.

         Gain (loss) on sale of proved properties. In December we closed the
sale of our Flour Bluff field in Texas and recognized a $2.6 million loss.

         Marketed Gas Revenue and Expense. For the year ended December 31, 2002,
we received $8.4 million from the sale of marketed natural gas produced by third
parties. Costs associated with these revenues totaled $8.0 million and resulted
in gross margin to us of $417,000. Due to pipeline imbalances, cost inflation,
and fluctuations in natural gas prices we may not always have a positive gross
margin from gas marketing activities.

         Oil and Gas Production Expenses. Oil and gas production expenses
consist of lease operating expenses, production taxes and transportation
expenses. Total production expenses decreased $4.2 million, or 8% in 2002 to
$50.8 million compared with $55.0 million in 2001. In the second quarter of 2002
our Gulf Coast region experienced a $2.7 million decrease in LOE that was
comprised of a decrease in workover expense and an adjustment due to the
issuance of a revised Authorization for Expenditure by the operator at Judge
Digby. This AFE indicated that workover LOE we previously expensed under the
original AFE should have been capitalized and recorded as property, plant and
equipment. Our total workover expense decreased $5.1 million from 2001 to 2002.
Other decreases in LOE attributable to our efforts to reduce LOE in total and on
a per MCFE basis were offset by $7.3 million of LOE incurred on properties


                                       42


acquired since November 2001, wells completed in 2002 and the $863,000 increase
in transportation costs. The $991,000 decrease in production taxes reflects the
decrease in revenue discussed above.

         Total production costs per MCFE decreased 10% to $0.92 for 2002
compared with $1.02 in 2001. This decrease is comprised of the following:

         o        A $0.03 per MCFE decrease in production taxes due to lower per
                  MCFE prices.
         o        A $0.09 per MCFE decrease in LOE, net of general inflation
                  increases, due to our efforts to decrease LOE in total and on
                  a per MCFE basis.
         o        A $0.10 per MCFE decrease in LOE attributable to the decrease
                  in total workover expense in excess of general cost inflation
                  increases.
         o        A $0.03 per MCFE increase in LOE and transportation costs
                  attributable to property acquisitions and 2002 well additions
                  outside of the Williston Basin.
         o        A $0.09 per MCFE increase in LOE and transportation costs
                  attributable to increased activity in the higher cost
                  Williston Basin.

         Although we continue to monitor these costs, we believe that the trend
of decreases in LOE on an absolute basis and on a per MCFE basis will not
continue into the future. New workover activity is always a possibility in our
Gulf Coast region, and it is likely that our acquisitions of producing
properties in the higher-cost, oil-based Williston Basin will cause a general
increase in LOE and will lead to additional workover activities as we attempt to
enhance the performance and lengthen the lives of those properties.

         Depreciation, Depletion, Amortization and Impairment. DD&A
increased $3.1 million or 6% to $54.4 million in 2002 compared with $51.3
million in 2001. This increase reflects both the increase in production between
the respective periods for 2002 and 2001 and acquisitions and drilling results
from both years that caused DD&A per MCFE to increase by 4% to $0.99 in 2002
compared with $0.95 in 2001.

         Abandonment and impairment of unproved properties decreased $1.4
million or 37% to $2.4 million in 2002 compared to $3.9 million in 2001. This
decrease is due to a decrease in abandonment of expired leases in 2002. It is
not likely that this trend will continue into the future due to our increased
investment in unproved properties from our acquisitions in late 2002 and early
2003.

         Exploration. Exploration expense for 2002 remained constant at $19.5
million. Percentages of total exploration expense are as follows:

                                                              2002       2001
                                                              ----       ----
         o        Geological and geophysical expenses          13%        19%
         o        Exploratory dry holes                        39%        47%
         o        Overhead and other expenses                  48%        34%

         In 2003 we have budgeted for geological and geophysical expenses and
expect to incur overhead and other expenses in the pursuit of exploration.
However, oil and gas exploration is imprecise, and success can be affected by
numerous factors. Not every likely geological structure contains oil or natural
gas. Even when oil or natural gas is discovered there are no guarantees that
sufficient quantities can be produced to justify the completion of an
exploratory well.

                                       43


         General and Administrative. General and administrative expenses
increased $2.5 million or 22% to $14.3 million in 2002 compared to $11.8 million
in 2001. On a per MCFE basis these costs increased 18% to $0.26 in 2002 from
$0.22 in 2001. We experienced an increase in non-compensation general expenses
of $1.0 million due primarily to increased personnel and general cost inflation.
This amount plus a $3.7 million increase in compensation expense associated with
increased personnel and our incentive plans were partially offset by a $2.2
million increase in COPAS overhead reimbursement from operations and costs
allocated to exploration expense. As we continue to grow in size and number of
personnel we expect that general and administrative expenses will also grow.
However, we anticipate that these expenses will decrease on a per MCFE basis in
2003.

         Interest Expense. Interest expense increased to $3.9 million in 2002.
This amount reflects accrued interest on our senior convertible notes. The
amount we accrued and paid in 2002 was affected by a fixed-rate to floating-rate
interest rate swap we entered into in March 2002 and closed at a net gain in
December 2002. Without this swap, interest expense for the period ending
December 31, 2002, would have been $4.6 million. We anticipate that interest
expense in 2003 will be significantly higher than the 2002 amount due to
termination of the interest rate swap and increased borrowing from our credit
facility.

         Income Taxes. Income tax expense totaled $15.0 million in 2002
resulting in an effective tax rate of 35.3% compared to $21.8 million in 2001 at
an effective tax rate of 35.0%. The effective rate change from 2001 reflects
increased accrued state income taxes from marginal rate adjustments offset by
adjustments to valuation allowances against state net operating loss carryovers.
We adjusted the valuation allowance after we considered a number of factors,
including our prior utilization of net operating losses and carryovers, tax
planning strategies for utilizing both federal and state net operating loss and
capital loss carryovers and projections of future taxable income. We also took
into account the reversal of prior temporary timing differences and the effect
that recent acquisitions will have on anticipated expenditures for intangible
drilling costs. Based on the weight of positive and negative evidence regarding
the recoverability of our net deferred tax assets, we concluded that only a
partial valuation allowance was required. Future effective tax rates could be
adversely affected if our taxable income increases to the point of being taxed
at the highest federal marginal rate, increased revenues in states with higher
statutory rates, unfavorable changes in tax laws and regulations, and by changes
in our opinion of our ability to absorb our deferred tax assets due to changes
in economic conditions.

         Net Income. Net income decreased to $27.6 million for 2002 compared to
$40.5 million for 2001. A 20% decrease in gas prices and a 3% decrease in gas
production partially offset by a 16% increase in oil production and a 9%
increase in oil price resulted in an $18.3 million decrease in oil and gas
production revenue between the two periods. Other large items causing a decrease
in net income were a $3.0 million decrease in gain from property sales, a $3.1
million increase in DD&A, a $2.5 million increase in G&A and a $3.5
million increase in interest expense. The decreases were partially offset by a
$4.8 million increase in derivative gains, a $4.2 million decrease in production
costs, and a $1.4 million decrease in unproved property impairment. The net
result of the changes caused a $6.8 million decrease in income tax expense.

2001 to 2000 Comparison

         Oil and Gas Production Revenues. Oil and gas production revenues
increased $15.6 million, or 8% to a record $204.0 million in 2001 compared to
$188.4 million in 2000. Revenue from gas production increased $15.3 million or
12%. This increase was a result of a gas production volume increase of 3% and an
8% increase in the average realized gas price to $3.73 per Mcf in 2001. Revenue


                                       44


from oil production increased $253,000. This increase resulted from an oil
production volume increase of 1% offset by a 1% decrease in the average realized
oil price to $23.29 per Bbl in 2001. Our share of revenue from wells completed
in 2001 added $27.5 million of revenue and our December 2000 acquisition of JN
Exploration properties added $11.5 million of revenue and average daily
production of 7.4 MMCFE in 2001. Average net daily production increased to a new
annual record of 148.2 MMCFE in 2001 compared to 144.1 MMCFE in 2000. Wells
completed in 2001 offset 22.3 MMCFE of decline in average daily production from
older properties.

         St. Mary hedged approximately 34.6% or 841 MBbls of its oil production
for 2001 and realized a $1.9 million decrease in oil revenue attributable to
hedging compared to a $13.2 million decrease in 2000. Without these contracts we
would have received an average price of $24.08 per Bbl in 2001 compared to
$29.01 per Bbl in 2000. We also hedged 40.6% of our 2001 gas production or 17.6
million MMBtu and realized a $19.2 million decrease in gas revenue attributable
to hedging compared to a $20.5 million decrease in gas revenues in 2000. Without
these contracts we would have received an average price of $4.22 per Mcf for
2001 compared to $3.97 per Mcf in 2000.

         Oil and Gas Production Expenses. Total production expenses increased
$16.5 million, or 43% in 2001 to $55.0 million compared with $38.5 million in
2000. During 2001 we experienced a $4.9 million increase in workover expense,
most of which related to activity in the Williston Basin and the Gulf Coast
Region. Williston Basin acquisitions in the last half of 2000 and in 2001 added
$1.7 million of LOE. Recurring LOE from our JN Exploration acquisition
properties represented $1.1 million of the increase and wells completed in 2001
added another $1.1 million. We experienced higher recurring LOE from wells
completed in the Williston Basin, the Permian Basin and the Gulf Coast/Gulf of
Mexico as a result of increased competition for limited availability of services
and general cost inflation. Higher production taxes and transportation expenses
resulting from higher oil and gas revenues account for $1.6 million of the
increase. Total production costs per MCFE increased 40% to $1.02 for 2001
compared with $0.73 in 2000. An $0.18 per MCFE increase was due to the increase
in workover expense, plus LOE from acquisitions and wells completed in 2001.
Another $0.02 per MCFE increase was due to increased production taxes and
transportation expenses. The remaining increase is due to general cost
inflation.

         Depreciation, Depletion, Amortization and Impairment. DD&A
increased $11.2 million or 28% to $51.3 million in 2001 compared with $40.1
million in 2000. DD&A expense per MCFE increased 25% to $0.95 in 2001
compared to $0.76 in 2000. This increase reflects acquisitions and drilling
results in 2000 and 2001 that added costs at a higher per unit rate. The
DD&A per MCFE rate was further affected by downward adjustments to reserves
due to pricing differences between December 31, 2001 and December 31, 2000.

         St. Mary recorded an $820,000 impairment of proved oil and gas
properties in 2001 compared with $4.4 million in 2000. Impairments in 2001
include a declining performance adjustment of $520,000 from the Thornton South
prospect in Texas and various marginal well impairments.

         Abandonment and impairment of unproved properties increased $2.0
million or 110% to $3.9 million in 2001 compared to $1.8 million in 2000. This
increase is due to an increase in abandonment of expired leases in 2001 and the
impairment of leasehold costs related to several exploratory dry holes.

                                       45


         Exploration. Exploration expense for 2001 increased $9.9 million or
103% to $19.5 million compared with $9.6 million in 2000. Percentages of total
exploration expense are as follows:

                                                              2001       2000
                                                              ----       ----
         o        Geological and geophysical expenses          19%        24%
         o        Exploratory dry holes                        47%        21%
         o        Overhead and other expenses                  34%        55%

         General and Administrative. General and administrative expenses
increased $596,000 or 5% to $11.8 million in 2001 compared to $11.2 million in
2000. Increases in compensation expense associated with increased personnel, our
incentive plans and general cost inflation were offset by a $4.3 million
increase in COPAS overhead reimbursements from operations and costs allocated to
exploration expense

         Income Taxes. Income tax expense totaled $21.8 million in 2001
resulting in an effective tax rate of 35.0% compared to $33.7 million in 2000
with an effective tax rate of 37.7%. The effective rate change from 2000
reflects decreased accrued state income taxes from marginal rate adjustments and
a decrease in deferred federal income tax due to a 1% rate decrease from the
highest federal marginal rate.

         Net Income. Net income decreased to $40.5 million for 2001 compared to
$55.6 million for 2000. An 8% increase in gas prices and a 3% increase in
production volumes resulted in a $15.6 million increase in oil and gas
production revenue. Increases in oil and gas production costs and DD&A of
$27.8 million, a $5.2 million decrease from gains on sale of proved property and
KMOC stock and a $9.9 million increase in exploration expense offset the
increase in revenue and an $11.8 million decrease in income tax expense.

Liquidity and Capital Resources

         Our primary sources of liquidity are the cash provided by operating
activities, debt financing, sales of non-strategic properties and access to the
capital markets. All of these sources can be impacted by significant
fluctuations in oil and gas prices. An unexpected decrease in prices would
reduce expected cash flow from operating activities, might reduce the borrowing
base on our credit facility, could reduce the value of our non-strategic
properties and historically has limited our industry's access to the capital
markets.

         We use cash for the acquisition, exploration and development of oil and
gas properties and for the payment of debt obligations, trade payables and
stockholder dividends. Exploration and development programs are generally
financed from internally generated cash flow, debt financing and cash and cash
equivalents on hand. In the event of an unexpected decrease in oil and gas
prices, cash uses such as the acquisition of oil and gas properties and the
payment of stockholder dividends are discretionary and can be reduced or
eliminated. At any given point in time, we may be obligated to pay for
commitments to explore for or develop oil and gas properties or incur trade
payables. However, future obligations can be reduced or eliminated when
necessary. We are currently only required to make interest payments on our debt
obligations. An unexpected increase in oil and gas prices provides flexibility
to modify our uses of cash flow.

         We continually review our capital expenditure budget to reflect changes
in current and projected cash flow, acquisition opportunities, debt requirements
and other factors.

                                       46


         Cash Flow. St. Mary's net cash provided by operating activities
increased $14.2 million or 11% to $141.7 million in 2002 compared to $127.5
million in 2001. The increase reflects a change between years of $29.3 million
in other current assets relating to the collection of receivables, payment of
prepaid items and collection of refundable income taxes. We also had a change
between years of $5.2 million from increased accounts payable. These items
increasing cash flow from operations were offset by a decrease in net income of
$13.1 million and a $7.1 million decrease in the effect of non-cash items
between the periods. We anticipate significantly increased cash flow from
operations in 2003 as a result of expected higher oil and gas prices in 2003 and
increased production attributable to our property acquisitions in late 2002 and
early 2003.

         St. Mary's net cash provided by operating activities increased $35.2
million or 40% to $127.5 million in 2001 compared to $92.3 million in 2000. The
increase reflects a change between years of $22.5 million from the collection of
receivables and a change between years of $15.4 million from increased accounts
payable.

         Net cash used in investing activities increased $21.8 million in 2002
to $180.9 million compared to $159.1 million in 2001. Total 2002 capital
expenditures for cash, including acquisitions of oil and gas properties,
increased $14.2 million or 8% to $184.7 million in 2002 compared to $170.5
million in 2001 due to an increase in acquisition activity in 2002 offset by our
planned decrease in cash expended on drilling activities.

         Net cash used in investing activities increased $46.2 million in 2001
to $159.1 million compared to $112.9 million in 2000. Total 2001 capital
expenditures for cash, including acquisitions of oil and gas properties,
increased $53.2 million or 45% to $170.5 million in 2001 compared to $117.3
million in 2000 due to an increase in drilling activity in 2001 offset by a
decrease in cash expended for oil and gas property purchases.

         Net cash provided by financing activities increased $17.2 million to
$46.3 million in 2002 compared to $29.1 million in 2001. This increase reflects
our March 2002 private placement of $100.0 million of 5.75% senior convertible
notes due 2022. A portion of the net proceeds of $96.7 million was used to repay
the balance due on our credit facility at that time. By year end we had borrowed
$14.0 million on our credit facility, and subsequent to year end we borrowed an
additional $56.0 million to finance acquisitions that closed in early 2003. We
did not repurchase any of our common stock during 2002.

         Net cash provided by financing activities increased $16.1 million to
$29.1 million in 2001 compared to $13.0 million in 2000. The increase is due to
a net $42.0 million increase in long-term debt during 2001 compared to a $9.0
million increase in 2000 offset by a $4.4 million decrease in proceeds received
from the sale of common stock related to our stock option programs. We also
repurchased $12.9 million of our common stock during 2001. We used our credit
facility to fund the acquisition of properties from Choctaw and finance current
operations.

         St. Mary had $11.2 million in cash and cash equivalents and had working
capital of $2.1 million as of December 31, 2002 compared to $4.1 million in cash
and cash equivalents and working capital of $34.2 million as of December 31,
2001.

         Pension Benefits. Substantially all of our employees who meet age and
service requirements participate in a non-contributory pension plan. At December
31, 2002, we have recorded a $1.2 million pre-tax loss in accumulated other
comprehensive income related to this plan. We believe this obligation will be
funded from future cash flow from operating activities. For purposes of
calculating our obligation under the plan, we have used an expected return on


                                       47


plan assets of 8%. We think this rate of return is appropriate over the
long-term given the 60% equity and 40% debt securities mix of investment for
plan assets and the historical rate of return provided by equity and debt
securities since the 1920s. Our actual rate of return for 2002 was a negative
10.0% and was a negative 0.7% for 2001. The difference in investment income
using our projected rate of return compared to our actual rates of return for
the past two years was not material and will not have a material effect on
statements of operation or cash flow from operating activities in future years.

         For the 2002 plan year, a 0.75% decrease in the discount rate combined
with a 0.25% decrease in the rate of future compensation increases caused a
$195,000 increase in the projected benefit obligation of the plan. We do not
believe this change was material and project that it will not have a material
effect on the results of operations or on cash flow from operating activities in
future periods.

         We also have a supplemental non-contributory pension plan that covers
certain management employees. There are no plan assets for this plan. For the
2002 plan year, a 0.75% decrease in the discount rate combined with a 0.25%
decrease in the rate of future compensation increases caused a $91,000 increase
in the projected benefit obligation for this plan. This plan's accumulated
benefit obligation was $853,000 at December 31, 2002, and was $685,000 at
December 31, 2001. We believe this obligation will be funded from future cash
flow from operating activities.

         Senior Convertible Notes. In March 2002 we issued in a private
placement a total of $100.0 million of our 5.75% senior convertible notes due
2022 with a 0.5% contingent interest provision. The contingent interest
provision did not apply to our first interest payment on September 15, 2002, but
it will apply to the payment due on March 15, 2003. Interest payments on the
notes will be made on March 15 and September 15 in subsequent years. We received
net proceeds of $96.7 million after deducting the initial purchasers' discount
and offering expenses paid by us. The notes are general unsecured obligations
and rank on a parity in right of payment with all our existing and future senior
indebtedness and other general unsecured obligations, and are senior in right of
payment with all our future subordinated indebtedness. The notes are convertible
into our common stock at a conversion price of $26.00 per share, subject to
adjustment. We can redeem the notes with cash in whole or in part at a
repurchase price of 100% of the principal amount plus accrued and unpaid
interest beginning on March 20, 2007. The note holders have the option of
requiring us to repurchase the notes for cash at 100% of the principal amount
plus accrued and unpaid interest upon (1) a change in control of St. Mary or (2)
on March 20, 2007, March 15, 2012 and March 15, 2017. If the note holders
require repurchase on March 20, 2007, we may pay the repurchase price with cash,
shares of our common stock valued at a discount to the market price at the time
of repurchase or any combination of cash and our discounted common stock. We are
not restricted from paying dividends, incurring debt, or issuing or repurchasing
our securities under the indenture for the notes. There are no financial
covenants in the indenture. We used a portion of the net proceeds from the notes
to repay our credit facility balance and used the remaining net proceeds to fund
a portion of our 2002 capital expenditures. On March 25, 2002, we entered into a
five-year fixed-rate to floating-rate interest rate swap on $50.0 million of the
notes. The floating rate was determined as LIBOR plus 0.36%. We elected to
terminate this swap on December 3, 2002, and received proceeds of $4.0 million.

         Credit Facility. At December 31, 2002, we had an unsecured long-term
revolving credit facility with a bank group consisting of Bank of America,
Comerica Bank-Texas and Wells Fargo Bank West. Under this facility, the maximum
loan amount was $200.0 million. The amount actually available depended upon a
borrowing base that the lenders periodically redetermined based on the value of


                                       48


our oil and gas properties and other assets. As of December 31, 2002, the stated
total possible borrowing base was $160.0 million. However, since we pay
commitment fees based on the unused portion of the borrowing base we limited the
borrowing base that we accepted to correspond with our actual funding
requirements. The accepted borrowing base was $40.0 million at December 31,
2002. The facility had a maturity date of December 31, 2006, and included a
revolving period that matured on June 30, 2003, at which time all outstanding
borrowings would convert to a term loan payable in quarterly installments
through the facility maturity date. We were required to comply with certain
covenants including maintenance of stockholders' equity at a specified level, as
well as restrictions on additional indebtedness, sales of oil and gas
properties, activities outside our ordinary course of business and certain
merger transactions. Borrowings under the facility were secured by a pledge of
collateral in favor of the banks and guarantees by subsidiaries. Such collateral
consisted of security interests in the oil and gas properties of St. Mary and
its subsidiaries.

         As of December 31, 2002 and 2001, $14.0 million and $64.0 million,
respectively, was outstanding under this credit agreement. These outstanding
balances accrued interest at rates determined by St. Mary's debt to total
capitalization ratio at our option of either:

      Debt to Capitalization Ratio        <30% =>30%<40% =>40%<50%  >50%
      ---------------------------------------------------------------------------------------

      Option (1)
           LIBOR plus                      1.000%          1.250%          1.375%   1.625%

      Option (2) - The higher of:
           Federal funds rate plus          0.50%           0.50%           0.50%    0.50%

           Prime rate plus                      -               -               -    0.25%

         At December 31, 2002 our debt to capitalization ratio as defined under
the credit agreement was 27.5%.

         On January 29, 2003, St. Mary entered into a new $300.0 million credit
facility with Wachovia Bank as Administrative Agent and eight other
participating banks. This new credit facility replaced our previous $200.0
million credit facility. The initial calculated borrowing base included
properties we acquired from Flying J Oil & Gas Inc. and Big West Oil &
Gas Inc. The borrowing base is currently at $215.0 million and will increase to
$250.0 million when we provide the remaining collateral. St. Mary has accepted
an initial commitment of $150.0 million under this facility. The credit
agreement has a maturity date of January 27, 2006. We are required to comply
with certain covenants that include a current ratio of 1.0 to 1.0, maintenance
of ERISA compliance, and restrictions on additional indebtedness, sales of oil
and gas properties, activities outside our ordinary course of business and
certain merger transactions. Interest is accrued based on the borrowing base
utilization percentage as LIBOR or the Alternate Base Rate (Prime), plus the
following:

Borrowing Base
Utilization Percentage          <50% =>50%<75%  =>75%<90%     =>90%                                                -                -                 -
- ----------------------------------------------------------------------------------------
Eurodollar Loans                 1.250%          1.500%           1.750%       2.000%
ABR Loans                        0.000%          0.250%           0.500%       0.750%
Commitment Fee Rate              0.300%          0.375%           0.375%       0.500%

                                       49


         On the date we entered into this credit facility our loan balance
accrued interest at LIBOR plus 1.25%.

         Schedule of Contractual Obligations. The following table summarizes our
future estimated principal payments and minimum lease payments for the periods
specified (in millions):

                                  Long-Term    Operating   Total Cash
                                     Debt        Leases    Obligation
                                  ------------------------------------

     Less than 1 year             $       -    $     1.6   $      1.6
     1-3 years                            -          2.5          2.5
     4-5 years                         14.0          1.9         15.9
     After 5 years                    100.0          3.7        103.7
                                  ------------------------------------
     Total                        $   114.0    $     9.7   $    123.7
                                  ====================================

         In the next three years, we have two leases of office space for our
regional offices that will expire. A third lease for office space will expire in
year 4. Estimated costs to replace these leases are not included in the table
above. For purposes of the table we assume that the holders of our senior
convertible notes will not exercise the conversion feature.

         Common Stock. At the annual stockholders meeting on May 23, 2001 the
stockholders of St. Mary voted to increase the amount of authorized common
shares to 100,000,000.

         In August 1998 our board of directors authorized a stock repurchase
program whereby we may purchase from time-to-time, in open market transactions
or negotiated sales, up to two million of our common shares. Through March 12,
2003 we had repurchased a total of 1,009,900 shares of St. Mary common stock
under the program for $16.2 million at a weighted average price of $15.86 per
share, net of put option sale premiums received. We anticipate that additional
purchases of shares may occur as market conditions warrant. Any future purchases
will be funded with internal cash flow and borrowings under our credit facility.

         On January 29, 2003, we issued a total of 3,380,818 restricted shares
of our common stock valued at $71.6 million to Flying J Oil & Gas Inc. and
Big West Oil & Gas Inc. for the acquisition of oil and gas properties, and
we made a non-recourse loan to Flying J and Big West in the amount of $71.6
million at LIBOR plus 2% for up to a 39-month period. The loan is secured by a
pledge of the 3,380,818 shares and during the 39-month loan period Flying J and
Big West can elect to sell these shares to St. Mary for $71.6 million plus
accrued interest on the loan for up to the first 30 months, and we can elect to
repurchase the shares for $97.4 million with the proceeds applied to repayment
of the loan. The shares are subject to contractual restrictions on transfer for
a period of two years. Flying J and Big West cannot increase their ownership
percentage in St. Mary for a period of 30 months.

         Capital and Exploration Expenditures. Expenditures for exploration and
development of oil and gas properties and acquisitions are the primary use of
our capital resources. The following table sets forth certain information
regarding the costs incurred by us in our oil and gas activities during the
periods indicated.


                                       50



                                           Capital and Exploration Expenditures
                                           ------------------------------------
                                                 For the Years Ended
                                                       December 31,
                                                       ------------
                                               2002        2001           2000
                                               ----        ----           ----
                                                      (In thousands)

            Development                      $ 74,376    $ 98,617      $ 48,996
            Exploration                        22,778      24,506        17,012
            Acquisitions:
              Proved                           87,706      41,188        53,482
              Unproved                          8,128      18,552         5,694
                                             --------    --------     ---------

                  Total                      $192,988    $182,863     $ 125,184
                                             ========    ========     =========

         We continuously evaluate opportunities in the marketplace for oil and
gas properties and, accordingly, may be a buyer or a seller of properties at
various times. We will continue to emphasize smaller niche acquisitions
utilizing our technical expertise, financial flexibility and structuring
experience. In addition, we are also actively seeking larger acquisitions of
assets or companies that would afford opportunities to expand our existing core
areas, to acquire additional geoscientists and/or engineers, or gain a
significant acreage and production foothold in a new basin.

         St. Mary's total costs incurred for capital and exploration activities
in 2002 increased $10.1 million or 6% compared to 2001. We spent $112.8 million
in 2002 for unproved property acquisitions and domestic exploration and
development compared to $141.7 million for the comparable period in 2001. This
decrease was a result of planned decreases in the drilling activity budget and a
$2.9 million decrease in unproved property acquisition activity. Well testing
continues on our two coalbed methane pilot programs located in the Hanging Woman
Basin. All pilot wells in the Antelope Draw field are currently shut-in while we
evaluate the data from dewatering. Prior to shut-in, production from the
Anderson coal averaged 250 Mcf/day. We are continuing to produce and test wells
at the Nest Prong field project. During the year, one of our partners exercised
their right to participate in a leasehold acquisition bringing our total to
145,000 gross acres in the project. We are subject to an environmental public
interest group lawsuit on 48,000 of these acres. See "Legal Proceedings" for a
discussion of this lawsuit.

         In November 2001 we purchased oil and gas properties from Choctaw II
Oil & Gas, Ltd. for $40.5 million in cash. We used a portion of our credit
facility for this acquisition. The properties are primarily located in the
Williston Basin of Montana and North Dakota and in the Green River Basin of
Wyoming.

         In December 2002 we purchased oil and gas properties from Burlington
Resources Oil & Gas Company LP for $69.5 million in cash. The properties are
located in the Williston Basin of Montana and North Dakota with extensive
overlap of ownership interest. Most of the properties will be operated by our
Nance subsidiary and are very concentrated in a manageable well count with high
ownership percentages in high quality long-lived properties. We financed this
acquisition using cash on hand and a portion of our bank credit facility. At the
time of acquisition, these properties were producing an estimated 3,100 Bbls of
oil per day and 3,300 Mcf of natural gas per day.

                                       51


         Capital Expenditure Budget. We anticipate spending approximately $225
million for capital and exploration expenditures in 2003 with $90 million
allocated for acquisitions of producing properties. Anticipated ongoing
exploration and development expenditures for each of our core areas is as
follows (in millions):

         o        Mid-Continent region                              $  45
         o        Williston Basin and Rockies region                $  33
         o        ArkLaTex region                                   $  19
         o        Gulf Coast and Gulf of Mexico region              $  17
         o        Permian Basin                                     $  12
         o        Other                                             $   9
                                                                    -----
         Total                                                       $135
                                                                    =====

         We believe that the amount not funded from our internally generated
cash flow in 2003 can be funded from our existing cash and our bank credit
facility. The amount and allocation of future capital and exploration
expenditures will depend upon a number of factors including the number and size
of available acquisition opportunities and our ability to assimilate these
acquisitions. Also, the impact of oil and gas prices on investment
opportunities, the availability of capital and borrowing capability and the
success of our development and exploratory activity could lead to funding
requirements for further development. If additional development or attractive
acquisition opportunities arise, we may consider other forms of financing,
including the public offering or private placement of equity or debt securities.

         In January 2003 we utilized our common stock, cash on hand and a
portion of our new credit facility to acquire $74.0 million of oil and gas
properties. On January 29, 2003, we closed a $71.6 million acquisition with
restricted shares of our common stock that included 66.9 BCFE or proved reserves
for $68.8 million of oil and gas properties and $2.8 million of cash for net
purchase price adjustments from Flying J Oil & Gas Inc. and Big West Oil
& Gas Inc. See the Common Stock section above for additional details. Half
of the value of the properties acquired is located in the Williston Basin. The
remaining value is split between the Powder River, Wind River and Green River
Basins of Wyoming and represents a significant increase of our presence in these
areas.

         We seek to protect our rate of return on acquisitions of producing
properties by hedging cash flow when the economic criteria from our evaluation
and pricing model indicate it would be appropriate. Management's strategy is to
hedge cash flows from investments currently requiring a gas price in excess of
$3.25 per Mcf and an oil price in excess of $22.50 per Bbl in order to meet
minimum rate-of-return criteria. Management reviews these hedging parameters on
a quarterly basis. We anticipate this strategy will result in the hedging of
future cash flows from acquisitions. We generally limit our aggregate hedge
position to no more than 50% of total production but will hedge larger
percentages of total production in certain circumstances. We seek to minimize
basis risk and index the majority of oil hedges to NYMEX prices and the majority
of gas hedges to various regional index prices associated with pipelines in
proximity to our areas of gas production. Our cash flow hedging instruments
generally qualify for cash flow hedge accounting under SFAS No. 133. Our policy
requires that we diversify our hedge positions with various counterparties and
requires that such counterparties have clear indications of current financial
strength. Including hedges entered into since December 31, 2002 we have the
following contracts in place:

                                       52


       Swaps
       -----
                                    Average          Quantity       Average Fixed
              Product            Volumes/month         Type        Contract Price       Duration
       ---------------------------------------------------------------------------------------------

            Natural Gas           1,599,000            MMBtu             $4.35        01/03 - 12/03
            Natural Gas             844,000            MMBtu             $4.04        01/04 - 12/04

                Oil                 206,200            Bbls             $25.94        01/03 - 12/03
                Oil                 144,500            Bbls             $23.71        01/04 - 12/04

       Collars
                                    Average            Floor           Ceiling
              Product            Volumes/month         Price            Price           Duration
       ---------------------------------------------------------------------------------------------

            Natural Gas             152,000 MMbtu      $2.50             $5.96        02/03 - 12/03


         On February 4, 2002, we entered into an agreement to monetize our
unrealized hedge gain receivable due from Enron for $1.1 million. This amount
was included in other comprehensive income at December 31, 2001, and was
recorded as a hedge gain in the first quarter of 2002. Hedge gains and losses
are reported in oil and gas production revenues in our consolidated statements
of operations. Amortization of $1.7 million of other comprehensive income
related to our commodity positions with Enron is also recorded in hedge gain. We
will record amortization of the remaining $49,000 of other comprehensive income
in hedge loss in 2003 for these contracts. Derivative gain in the consolidated
statements of operations includes $31,000 of net loss from oil and gas hedge
ineffectiveness.

         Other Derivatives. Our senior convertible notes contain a provision for
payment of contingent interest if certain conditions are met. Under SFAS No. 133
this provision is considered an embedded equity-related derivative that is not
clearly and closely related to the fair value of an equity interest and
therefore must be separated and accounted for as a derivative instrument. The
value of the derivative at issuance was $474,000. This amount was recorded as a
decrease to the convertible notes payable in the consolidated balance sheets. Of
this amount, $75,000 was amortized through interest expense in 2002. Derivative
gain in the consolidated statements of operations includes $341,000 of net loss
from mark-to-market adjustments for this derivative.

                  Our fixed-rate to floating-rate interest rate swap on $50.0
million of senior convertible notes did not qualify for fair value hedge
treatment under SFAS No. 133. We entered into this contract in March 2002 and
closed it out in December 2002. Derivative gain in the consolidated statements
of operations includes $3.6 million of net gain from the termination of this
contract.

Accounting Matters

         In December 2002 the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure:
an amendment of FASB Statement No. 123." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for

                                       53


stock-based employee compensation and the effect of the method used on reported
results. The statement is effective for financial statements for fiscal years
ending after December 15, 2002. We will continue to account for stock-based
compensation using the methods detailed in Accounting Principles Board Opinion
No.25, "Accounting for Stock Issued to Employees."

         In June 2002 the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and requires recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. We do not have any
pending or planned exit or disposal activities and do not expect a material
effect on our financial position or results of operations from the adoption of
this statement.

         In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires that gains and losses from extinguishment of
debt be evaluated under the provisions of Accounting Principles Board Opinion
No. 30 and be classified as ordinary items unless they are unusual or infrequent
or meet the specific criteria for treatment as an extraordinary item. This
statement is effective for fiscal years beginning after May 15, 2002. We do not
anticipate that the adoption of this statement will have a material effect on
our financial position or results of operations.

                  In July 2001 the FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations." This statement requires companies to recognize
the fair value of an asset retirement liability in the financial statements by
capitalizing that cost as part of the cost of the related long-lived asset. The
asset retirement liability should then be allocated to expense by using a
systematic and rational method. The statement is effective January 1, 2003. We
have not determined the impact of adoption of this statement.

Effects of Inflation and Changing Prices

         Within the United States in 2002 and 2001 general cost inflation had an
effect on St. Mary as reflected in increased drilling costs and lease operating
costs. We cannot predict the future extent of any such effect.

         St. Mary's results of operations and cash flows are affected by
material changes in oil and gas prices. Oil and gas prices are strongly impacted
by North American influences on natural gas and global influences on oil in
relation to supply and demand for petroleum products. Oil and gas prices are
further impacted by the quality of the oil and gas to be sold and the location
of our producing properties in relation to markets for our products. Oil and gas
price increases or decreases have a corresponding effect on our revenues from
oil and gas sales. Oil and gas prices also affect the prices charged for
drilling and related services. As oil and gas prices increase, revenues increase
and there is usually a corresponding increase in our costs of drilling and
related services. Also as oil and gas prices increase, the cost of acquiring
producing properties increases, which could limit the number and accessibility
of quality properties on the market.

         Material changes in oil and gas prices affect the current and future
value of our estimated proved reserves and our borrowing capability, which is
largely based on the value of such proved reserves. More stable natural gas and
oil prices characterized most of 2002. Rig costs and operating costs decreased
slightly. At the end of the year, in spite of a weakened economy, less than


                                       54


normal gas in storage, cold weather, a continuing petroleum industry strike in
Venezuela and the possibility of escalating conflict in the Middle East are
causing both oil and natural gas prices to increase. However, higher oil and gas
prices have not caused rig utilization to increase to the extent many expected.
In the near-term we do not expect competition for these limited resources to
increase, but continued high prices will encourage development activity and
could result in increases in the cost of both materials and personnel and
corresponding effects on the cost to explore for, drill for and produce oil and
gas. We continue to have good relationships with our vendors due to our
reputation for timely payment of invoices, a positive by-product of our strong
balance sheet.

Environmental

         St. Mary's compliance with applicable environmental regulations has not
resulted in any significant capital expenditures or materially adverse effects
to our liquidity or results of operations. We believe we are in substantial
compliance with environmental regulations and foresee that no material
expenditures will be incurred in the future. However, we are unable to predict
the impact that future compliance with regulations may have on future capital
expenditures, liquidity and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We hold derivative contracts and financial instruments that have cash
flow and net income exposure to changes in commodity prices or interest rates.
Financial and commodity-based derivative contracts are used to limit the risks
inherent in some crude oil and natural gas price changes that have an effect on
us.

         Our board of directors has adopted a policy regarding the use of
derivative instruments. This policy requires every derivative used by St. Mary
to relate to underlying offsetting positions, anticipated transactions or firm
commitments. It prohibits the use of speculative, highly complex or leveraged
derivatives. Under the policy, the Chief Executive Officer and Vice President of
Finance must review and approve all risk management programs that use
derivatives. The board of directors and the audit committee periodically review
these programs.

         Commodity Price Risk. We use various hedging arrangements to manage our
exposure to price risk from natural gas and crude oil production. These hedging
arrangements have the effect of locking in for specified periods, at
predetermined prices or ranges of prices, the prices we will receive for the
volumes to which the hedge relates. Consequently, while these hedging
arrangements are structured to reduce our exposure to decreases in prices
associated with the hedged commodity, they also limit the benefit we might
otherwise receive from any price increases associated with the hedged commodity.
The derivative gain or loss effectively offsets the loss or gain on the
underlying commodity exposures that have been hedged. The fair value of the
swaps are estimated based on quoted market prices of comparable contracts and
approximate the net gains or losses that would have been realized if the
contracts had been closed out at year-end. The fair values of the futures are
based on quoted market prices obtained from the New York Mercantile Exchange
adjusted fpr basis differentials.

         For contracts in place on December 31, 2002, a hypothetical $0.10
change in the future NYMEX strip prices applied to a notional amount of 12.4
million MMBtu covered by natural gas swaps would cause a change in the gain or
(loss) from these contracts of $853,000 in 2003 and $321,000 in 2004. A
hypothetical $1.00 change in future NYMEX oil prices applied to a notional
amount of 2.5 MMBbls covered by crude oil swaps would cause a change in the gain

                                       55


or (loss) from these contracts of $1.7 million in 2003 and $654,000 in 2004.
These hypothetical changes were discounted to present value using a 7.5%
discount rate since the latest expected maturity date of some of the swaps and
futures contracts is greater than one year from the reporting date.

         Interest Rate Risk. Market risk is estimated as the potential change in
fair value resulting from an immediate hypothetical one-percentage point
parallel shift in the yield curve. The sensitivity analysis presents the
hypothetical change in fair value of those financial instruments we held at
December 31, 2002, that are sensitive to changes in interest rates. For
fixed-rate debt, interest rate changes affect the fair market value but do not
impact results of operations or cash flows. Conversely for floating-rate debt,
interest rate changes generally do not affect the fair market value but do
impact future results of operations and cash flows, assuming other factors are
held constant. The carrying amount of our floating rate debt approximates its
fair value. At December 31, 2002, we had floating-rate debt of $14.0 million and
had $100.0 million of fixed-rate debt. Assuming constant debt levels, the cash
flow impact for the next year resulting from a one-percentage point change in
interest rates would be approximately $140,000 before taxes. The results of
operations impact might be less than this amount as a direct effect of the
capitalization of interest to wells drilled in the next year. In prior years
when our debt amount was at a reduced level we capitalized a large portion of
our interest expense. Since we cannot predict the exact amount that would be
capitalized, we cannot predict the exact effect that a one-percentage point
shift would have on the results of operations.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The Consolidated Financial Statements that constitute Item 8 follow the
text of this report. An index to the Consolidated Financial Statements and
Schedules appears in Item 14(a) of this report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

         As previously reported in our current reports on Form 8-K filed with
the SEC on May 30, 2002 and June 5, 2002, on May 23, 2002 we dismissed Arthur
Andersen LLP as our independent accountants and on June 3, 2002 we engaged
Deloitte & Touche LLP as our new independent accountants. The St. Mary audit
committee and board of directors approved this change in accountants.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information required by this Item concerning St. Mar's directors is
incorporated by reference to the information provided under the captions
"Election of Directors" and "Nominees for Election of Directors" in St. Mary's
definitive proxy statement for the 2003 annual meeting of stockholders to be
filed within 120 days from December 31, 2002. The information required by this
Item concerning St. Mary's executive officers is incorporated by reference to
the information provided in Part I-Item 4A-Executive Officers of the Registrant,
included in this Form 10-K.

         The information required by this Item concerning compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference to the information provided under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" in St. Mary's definitive proxy

                                       56


statement for the 2003 annual meeting of stockholders to be filed within 120
days from December 31, 2002.

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this Item is incorporated by reference to
the information provided under the captions, "Director Compensation," "Executive
Compensation," "Report of the Compensation Committee on Executive Compensation,"
"Retirement Plans," "Performance Graph," and "Employee Agreements and
Termination of Employment and Change-in-Control Arrangements" in St. Mary's
definitive proxy statement for the 2003 annual meeting of stockholders to be
filed within 120 days from December 31, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT AND RELATED STOCKHOLDER MATTERS

         The information required by this Item concerning security ownership of
certain beneficial owners and management is incorporated by reference to the
information provided under the caption "Security Ownership of Certain Beneficial
Owners and Management" in St. Mary's definitive proxy statement for the 2003
annual meeting of stockholders to be filed within 120 days from December 31,
2002.

         The information required by this Item concerning securities authorized
for issuance under equity compensation plans is incorporated by reference to the
information provided under the caption "Equity Compensation Plans" in Part II -
Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters,
included in this form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this Item is incorporated by reference to
the information provided under the caption "Certain Relationships and Related
Transactions" in St. Mary's definitive proxy statement for the 2003 annual
meeting of stockholders to be filed within 120 days from December 31, 2002.

ITEM 14. CONTROLS AND PROCEDURES

         We maintain a system of disclosure controls and procedures that are
designed for the purposes of ensuring that information required to be disclosed
in our SEC reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including the Chief Executive
Officer and the Vice-President - Finance, as appropriate to allow timely
decisions regarding required disclosure.

         Within the 90-day period prior to the filing of this report, we carried
out an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and the Vice-President -
Finance, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and the Vice-President - Finance concluded that our disclosure controls and
procedures are effective for the purposes discussed above. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the evaluation.

                                       57


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a)(1) and (a)(2) Financial Statements and Financial Statement Schedules:

         Reports of Independent Auditors....................................F-1
         Reports of Independent Public Accountants..........................F-2
         Consolidated Balance Sheets........................................F-3
         Consolidated Statements of Operations..............................F-4
         Consolidated Statements of Stockholders' Equity and
           Comprehensive Income...........................................  F-5
         Consolidated Statements of Cash Flows..............................F-6
         Notes to Consolidated Financial Statements.........................F-8

         All other schedules are omitted because the required information is not
applicable or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the Consolidated
Financial Statements and Notes thereto.

    (b) Reports on Form 8-K.

         St. Mary Land & Exploration Company filed the following current
reports on Form 8-K during the quarter ended December 31, 2002:

         On October 3, 2002, we filed a current report on Form 8-K reporting
under Item 5 that we had signed a Purchase and Sale Agreement to acquire oil and
gas properties from Burlington Resources Oil & Gas Company LP.

         On November 7, 2002, we filed a current report on Form 8-K reporting
under Item 9 that we had issued a press release announcing our earnings and
financial highlights for the third quarter of 2002.

         On November 20, 2002, we filed a current report on Form 8-K reporting
under Item 9 that in connection with the filing of the Form 10-Q on November 13,
2002, the Chief Executive Officer and the Vice-President - Finance of the
registrant each signed a Certification pursuant to Section 906 of the Sarbanes -
Oxley Act of 2002.

         On December 12, 2002, we filed a current report on Form 8-K reporting
under Item 2 that on December 3, 2002, we purchased oil and gas properties from
Burlington Resources Oil & Gas Company LP.

         On December 16, 2002, we filed a current report on Form 8-K reporting
under Item 5 that we had issued a press release announcing an agreement to
acquire oil and gas properties from Flying J Oil & Gas and Big West Oil
& Gas.

    (c) Exhibits. The following exhibits are filed with or incorporated by
reference into this report on Form 10-K:

                                       58


         Exhibit
         Number      Description
         -------     -----------

         2.1      Agreement and Plan of Merger dated July 27, 1999 among St.
                  Mary Land & Exploration Company, St. Mary Acquisition
                  Corporation, King Ranch, Inc. and King Ranch Energy, Inc. as
                  amended by Amendment No. 1 and Amendment No. 2 to Agreement
                  and Plan of Merger dated November 8, 1999 (included as Annex A
                  to the joint proxy/consent statement and prospectus contained
                  in the registrant's Amendment No. 2 to Form S-4/A
                  (Registration No. 333-85537) filed on November 12, 1999 and
                  incorporated herein by reference)
         2.2      Stock Exchange Agreement dated June 1, 1999 among St. Mary
                  Land & Exploration Company, Robert L. Nance, Penni W.
                  Nance, Amy Nance Cebull and Robert Scott Nance (filed as
                  Exhibit 10.27 to the registrant's Registration Statement on
                  Form S-4 (Registration No. 333-85537) filed on August 19, 1999
                  and incorporated herein by reference)
         2.3      Stock Exchange Agreement dated June 1, 1999 among St. Mary
                  Land & Exploration Company, Robert L. Nance and Robert T.
                  Hanley (filed as Exhibit 10.28 to the registrant's
                  Registration Statement on Form S-4 (Registration No.
                  333-85537) filed on August 19, 1999 and incorporated herein by
                  reference)
         2.4      Stock Exchange Agreement dated June 1, 1999 between St. Mary
                  Land & Exploration Company and Robert T. Hanley (filed as
                  Exhibit 10.29 to the registrant's Registration Statement on
                  Form S-4 (Registration No. 333-85537) filed on August 19, 1999
                  and incorporated herein by reference)
         3.1      Restated Certificate of Incorporation of St. Mary Land &
                  Exploration Company as amended in May 2001 (filed as Exhibit
                  3.1 to the registrant's Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2001 and incorporated herein by
                  reference)
         3.2      Restated By-Laws of St. Mary Land & Exploration Company as
                  amended in July 2001 (filed as Exhibit 3.1 to the registrant's
                  Quarterly Report on Form 10-Q (File No. 0-20872) for the
                  quarter ended September 30, 2001 and incorporated herein by
                  reference)
         4.1      St. Mary Land & Exploration Company Shareholder Rights
                  Plan adopted on July 15, 1999 (filed as Exhibit 4.1 to the
                  registrant's Quarterly Report on Form 10-Q/A (File No.
                  0-20872) for the quarter ended June 30, 1999 and incorporated
                  herein by reference)
         4.2      First Amendment to Shareholders Rights Plan dated March 15,
                  2002 as adopted by the Board of Directors on July 19, 2001
                  (filed as Exhibit 4.2 to the registrant's Annual Report on
                  Form 10-K (File No. 0-20872) for the year ended December 31,
                  2001 and incorporated herein by reference)
         10.1     Stock Option Plan (filed as Exhibit 10.3 to the registrant's
                  Registration Statement on Form S-1 (Registration No. 33-53512)
                  and incorporated herein by reference)
         10.2     Stock Appreciation Rights Plan (filed as Exhibit 10.4 to the
                  registrant's Registration Statement on Form S-1 (Registration
                  No. 33-53512) and incorporated herein by reference)
         10.3     Cash Bonus Plan (filed as Exhibit 10.5 to the registrant's
                  Registration Statement on Form S-1 (Registration No. 33-53512)
                  and incorporated herein by reference)
         10.4     Net Profits Interest Bonus Plan, As Amended on September 19,
                  1996 and July 24, 1997 and January 28, 1999 filed as Exhibit
                  10.3 to registrant's Quarterly Report on Form 10-Q (File No.
                  0-20872) for the quarter ended March 31, 1999 and incorporated
                  herein by reference)

                                       59


         Exhibit
         Number   Description
         -------  -----------

         10.5     Summary Plan Description/Pension Plan dated December 30, 1994
                  (filed as Exhibit 10.35 to the registrant's Annual Report on
                  Form 10-K (File No. 0-20872) for the year ended December 31,
                  1994 and incorporated herein by reference)
         10.6     Non-qualified Unfunded Supplemental Retirement Plan, as
                  amended (filed as Exhibit 10.8 to the registrant's
                  Registration Statement on Form S-1 (Registration No. 33-53512)
                  and incorporated herein by reference)
         10.7     Summary Plan Description 401(k) Profit Sharing Plan (filed as
                  Exhibit 10.34 to the registrant's Annual Report on Form 10-K
                  (File No. 0-20872) for the year ended December 31, 1994 and
                  incorporated herein by reference)
         10.8     St. Mary Land & Exploration Company Stock Option Plan, As
                  Amended on March 29, 2001 (filed as Exhibit 99.1 to
                  registrant's Registration Statement on Form S-8 (Registration
                  No. 333-88780) and incorporated herein by reference)
         10.9     St. Mary Land & Exploration Company Incentive Stock Option
                  Plan, As Amended on March 29, 2001 (filed as Exhibit 99.2 to
                  registrant's Registration Statement on Form S-8 (Registration
                  No. 333-88780) and incorporated herein by reference)
         10.10    St. Mary Land & Exploration Company Employee Stock
                  Purchase Plan (filed as Exhibit 10.48 filed to the
                  registrant's Annual Report on Form 10-K (File No. 0-20872) for
                  the year ended December 31, 1997 and incorporated herein by
                  reference)
         10.11    First Amendment to St. Mary Land & Exploration Company
                  Employee Stock Purchase Plan dated February 27, 2001 (filed as
                  Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
                  (file No. 0-20872) for the quarter ended June 30, 2001 and
                  incorporated herein by reference)
         10.12    Form of Change of Control Severance Agreements (filed as
                  Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
                  (File No. 0-20872) for the quarter ended September 30, 2001
                  and incorporated herein by reference)
         10.13    Employment Agreement between Registrant and Mark A.
                  Hellerstein (filed as Exhibit 10.15 to the registrant's
                  Registration Statement on Form S-1 (Registration No. 33-53512)
                  and incorporated herein by reference)
         10.14    Credit Agreement dated June 30, 1998 (filed as Exhibit 10.52
                  to the registrant's Quarterly Report on Form 10-Q (File No.
                  0-20872) for the quarter ended June 30, 1998 and incorporated
                  herein by reference)
         10.15    Second Amendment to Credit Agreement dated June 27, 2000
                  (filed as Exhibit 10.1 to the registrant's Quarterly Report on
                  Form 10-Q (File No. 0-20872) for the quarter ended June 30,
                  2000 and incorporated herein by reference)
         10.16    Third Amendment to Credit Agreement dated April 30, 2001
                  (filed as Exhibit 10.2 to the registrant's Quarterly Report on
                  Form 10-Q (File No. 0-20872) for the quarter ended June 30,
                  2001 and incorporated herein by reference)
         10.17    Loan and Stock Purchase Agreement dated June 25, 1999 among
                  Resource Capital Fund L.P., St. Mary Land & Exploration
                  Company and St. Mary Minerals Inc. (filed as Exhibit 10.30 to
                  the registrant's Registration Statement on Form S-4
                  (Registration No. 333-85537) filed on August 19, 1999 and
                  incorporated herein by reference)
         10.18    Credit Agreement dated June 25, 1999 among Summo Minerals
                  Corporation, Summo USA Corporation, Resource Capital Fund L.P.
                  and St. Mary Minerals Inc. (filed as Exhibit 10.31 to the
                  registrant's Registration Statement on Form S-4 (Registration

                                       60


         Exhibit
         Number   Description
         -------  -----------

                  No. 333-85537) filed on August 19, 1999 and incorporated
                  herein by reference)
         10.19    Replacement Promissory Note dated June 25, 1999 payable to St.
                  Mary Minerals Inc. in the amount of $1,400,000 (filed as
                  Exhibit 10.32 to the registrant's Registration Statement on
                  Form S-4 (Registration No. 333-85537) filed on August 19, 1999
                  and incorporated herein by reference)
         10.20    Pledge and Security Agreement dated June 25, 1999 among Summo
                  Minerals Corporation, Resource Capital Fund L.P., and St. Mary
                  Minerals Inc. (filed as Exhibit 10.33 to the registrant's
                  Registration Statement on Form S-4 (Registration No.
                  333-85537) filed on August 19, 1999 and incorporated herein by
                  reference)
         10.21    Pledge and Security Agreement dated June 25, 1999 among Summo
                  USA Corporation, Resource Capital Fund L.P., and St. Mary
                  Minerals Inc. (filed as Exhibit 10.34 to the registrant's
                  Registration Statement on Form S-4 (Registration No.
                  333-85537) filed on August 19, 1999 and incorporated herein by
                  reference)
         10.22    Warrant Agreement dated June 25, 1999 among Summo Minerals
                  Corporation, Resource Capital Fund L.P. and St. Mary Minerals
                  Inc. (filed as Exhibit 10.35 to the registrant's Registration
                  Statement on Form S-4 (Registration No. 333-85537) filed on
                  August 19, 1999 and incorporated herein by reference)
         10.23    Agreement of Sale and Purchase dated October 16, 2000,
                  effective as of September 1, 2000, between JN Exploration and
                  Production Limited Partnership, Colt Resources Corporation,
                  Princeps Partners, Inc., and The William G. Helis Company, LLC
                  (collectively, "JN et al") and St. Mary Land & Exploration
                  Company (filed as Exhibit 10.1 to the registrant's Current
                  Report on Form 8-K (File No. 0-20872) dated January 5, 2001
                  and incorporated herein by reference)
         10.24    Purchase and Sale Agreement dated September 28, 2001,
                  effective as of September 1, 2001; between Choctaw II Oil
                  & Gas, LTD and Nance Petroleum Corporation (filed as
                  Exhibit 10.1 to the registrant's Current Report on Form 8-K
                  (File No. 0-20872) dated December 10, 2001 and incorporated
                  herein by reference)
         10.25    Registration Rights Agreement between St. Mary Land &
                  Exploration Company and Bear, Stearns & Co. Inc., et al
                  dated March 13, 2002 (filed as Exhibit 10.25 to the
                  registrant's Annual Report on Form 10-K (File No. 0-20872) for
                  the year ended December 31, 2001 and incorporated herein by
                  reference)
         10.26    St. Mary Land & Exploration Company 5.75% Senior
                  Convertible Notes Due 2002 Indenture dated March 13, 2002
                  (filed as Exhibit 10.26 to the registrant's Annual Report on
                  Form 10-K (File No. 0-20872) for the year ended December 31,
                  2001 and incorporated herein by reference)
         10.27    First Amendment to Credit Agreement dated December 22, 1998
                  (filed as Exhibit 10.27 to the registrant's Annual Report on
                  Form 10-K (File No. 0-20872) for the year ended December 31,
                  2001 and incorporated herein by reference)
         10.28    Fourth Amendment to Credit Agreement dated March 4, 2002
                  (filed as Exhibit 10.28 to the registrant's Annual Report on
                  Form 10-K (File No. 0-20872) for the year ended December 31,
                  2001 and incorporated herein by reference)
         10.29    Purchase and Sale Agreement dated October 1, 2002, effective
                  as of July 1, 2002; between Burlington Resources Oil & Gas
                  Company LP and The Louisiana Land and Exploration Company and
                  Nance Petroleum Corporation (filed as Exhibit 10.1 to the

                                       61


         Exhibit
         Number   Description
         -------  -----------

                  registrant's Current Report on Form 8-K (File No. 001-31539)
                  filed on December 12, 2002 and incorporated herein by
                  reference )
         10.30    Purchase and Sale Agreement dated as of December 13, 2002
                  among Flying J Oil & Gas Inc., Big West Oil & Gas
                  Inc., NPC Inc. and St. Mary Land & Exploration Company
                  (filed as Exhibit 10.1 to the registrant's Current Report on
                  Form 8-K (File No. 001-31539) filed on February 13, 2003 and
                  incorporated herein by reference)
         10.31    Addendum dated January 29, 2003 to Purchase and Sale Agreement
                  dated December 13, 2002 (filed as Exhibit 10.2 to the
                  registrant's Current Report on Form 8-K (File No. 001-31539)
                  filed on February 13, 2003 and incorporated herein by
                  reference)
         10.32    Nonrecourse Secured Promissory Note dated January 29, 2003 by
                  Flying J Oil & Gas Inc. and Big West Oil & Gas Inc.
                  (filed as Exhibit 10.3 to the registrant's Current Report on
                  Form 8-K (File No. 001-31539) filed on February 13, 2003 and
                  incorporated herein by reference)
         10.33    Stock Pledge Agreement from Flying J Oil & Gas Inc. and
                  Big West Oil & Gas Inc. to St. Mary Land & Exploration
                  Company executed as of January 29, 2003 (filed as Exhibit 10.4
                  to the registrant's Current Report on Form 8-K (File No.
                  001-31539) filed on February 13, 2003 and incorporated herein
                  by reference)
         10.34    Registration Rights Agreement dated as of January 29, 2003
                  among St. Mary Land & Exploration Company, Flying J Oil
                  & Gas Inc. and Big West Oil & Gas Inc. (filed as
                  Exhibit 10.5 to the registrant's Current Report on Form 8-K
                  (File No. 001-31539) filed on February 13, 2003 and
                  incorporated herein by reference)
         10.35    Put and Call Option Agreement dated as of January 29, 2003
                  among St. Mary Land & Exploration Company, Flying J Oil
                  & Gas Inc. and Big West Oil & Gas Inc. (filed as
                  Exhibit 10.6 to the registrant's Current Report on Form 8-K
                  (File No. 001-31539) filed on February 13, 2003 and
                  incorporated herein by reference)
         10.36    Standstill Agreement dated as of January 29, 2003 among St.
                  Mary Land & Exploration Company, Flying J Oil & Gas
                  Inc. and Big West Oil & Gas Inc. (filed as Exhibit 10.7 to
                  the registrant's Current Report on Form 8-K (File No.
                  001-31539) filed on February 13, 2003 and incorporated herein
                  by reference) 10.37 Share Transfer Restriction Agreement dated
                  as of January 29, 2003 among St. Mary Land & Exploration
                  Company, Flying J Oil & Gas Inc. and Big West Oil &
                  Gas Inc. (filed as Exhibit 10.8 to the registrant's Current
                  Report on Form 8-K (File No. 001-31539) filed on February 13,
                  2003 and incorporated herein by reference)
         10.38    Indemnity Guarantee Agreement dated January 29, 2003 between
                  NPC Inc. and Flying J Inc. (filed as Exhibit 10.9 to the
                  registrant's Current Report on Form 8-K (File No. 001-31539)
                  filed on February 13, 2003 and incorporated herein by
                  reference)
         10.39    Promissory Note dated July 21, 2000 and Letter Agreement dated
                  July 21, 2000 for $200,000 Relocation Loan to Robert T. Hanley
                  (filed as Exhibit 10.29 to the registrant's Annual Report on
                  Form 10-K/A No. 2 (File No. 0-20872) for the year ended
                  December 31, 2001 and incorporated herein by reference)
         10.40    Security Agreement made as of May 1, 2002 by St. Mary Land
                  & Exploration Company, St. Mary Operating Company, St.
                  Mary Energy Company, Nance Petroleum Corporation, St. Mary
                  Minerals Inc., Parish Corporation, Four Winds Marketing LLC,
                  and Roswell LLC, in favor of Bank of America, N.A. (filed as

                                       62


         Exhibit
         Number   Description
         -------  -----------

                  Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
                  (File No. 000-20872) for the quarter ended June 30, 2002 and
                  incorporated herein by reference)
         10.41    Stock Pledge Agreement made as of May 1, 2002 by St. Mary Land
                  & Exploration Company in favor of Bank of America, N.A.
                  (filed as Exhibit 10.2 to the registrant's Quarterly Report on
                  Form 10-Q (File No. 000-20872) for the quarter ended June 30,
                  2002 and incorporated herein by reference)
         10.42    LLC Pledge Agreement made as of May 1, 2002 by St. Mary Land
                  & Exploration Company in favor of Bank of America, N.A.
                  (filed as Exhibit 10.3 to the registrant's Quarterly Report on
                  Form 10-Q (File No. 000-20872) for the quarter ended June 30,
                  2002 and incorporated herein by reference)
         10.43    Guaranty made as of May 1, 2002 by St. Mary Operating Company,
                  St. Mary Energy Company, Nance Petroleum Corporation, St. Mary
                  Minerals, Inc., Parish Corporation, Four Winds Marketing LLC
                  and Roswell LLC in favor of Bank of America, N.A. (filed as
                  Exhibit 10.4 to the registrant's Quarterly Report on Form 10-Q
                  (File No. 000-20872) for the quarter ended June 30, 2002 and
                  incorporated herein by reference)
         10.44*   Credit Agreement dated as of January 27, 2003 among St. Mary
                  Land & Exploration Company, Wachovia Bank, National
                  Association of Administrative Agent, and the Lenders party
                  thereto
         10.45*   Amendment to and Extension of Office Lease dated as of
                  December 14, 2001
         12.1*    Computation of Ratios of Earnings to Fixed Charges
         16.1     Letter by Arthur  Andersen LLP to the  Securities and Exchange
                  Commission  dated May 28, 2002  (filed as Exhibit  16.1 to the
                  registrant's  Current Report on Form 8-K (File No.  000-20872)
                  filed on May 30, 2002 and incorporated herein by reference)
         21.1*    Subsidiaries of Registrant
         23.1*    Consent of Deloitte & Touche LLP
         23.2*    Information About Lack of Consent of Arthur Andersen LLP
         23.3*    Consent of Ryder Scott Company, L.P.
         24.1*    Power of Attorney (included in signature page hereof)

         ------------------------------
         *    Filed with this Form 10-K.


    (d) Financial Statement Schedules. See Item 14(c) above.


                                       63



INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
St. Mary Land & Exploration Company and Subsidiaries

We have audited the accompanying consolidated balance sheet of St. Mary Land
& Exploration Company and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The Company's consolidated financial statements for each of the years
in the two-year period ended December 31, 2001, were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those consolidated financial statements in their report dated February 18, 2002,
which report included an explanatory paragraph for the change in method of
accounting for derivative instruments and hedging activities on January 1, 2001.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America.


/s/ DELOITTE & TOUCHE LLP
Denver, Colorado
February 19, 2003




                                      F-1



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS






To the Board of Directors and Stockholders of
St. Mary Land & Exploration Company and Subsidiaries:

We have audited the accompanying consolidated balance sheets of St. Mary
Land & Exploration Company (a Delaware corporation) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and comprehensive income, and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit 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 St.
Mary Land & Exploration Company and subsidiaries as of December 31, 2001
and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States.

As explained in Notes 1 and 10 to the consolidated financial statements,
the Company changed its method of accounting for derivative instruments
and hedging activities on January 1, 2001.



                                          /s/ ARTHUR ANDERSEN LLP


       Denver, Colorado,
         February 18, 2002.



NOTE: This Report of Independent Public Accountants dated February 18, 2002 by
Arthur Andersen LLP is a copy of the report previously issued by Arthur Andersen
LLP and included with Arthur Andersen LLP's consent in the Annual Report on Form
10-K for the year ended December 31, 2001 filed with the SEC on March 19, 2002
and the Annual Report on Form 10-K/A for the year ended December 31, 2001 filed
with the SEC on March 25, 2002. Such report has not been reissued by Arthur
Andersen LLP for inclusion with this Annual Report on Form 10-K for the year
ended December 31, 2002. After reasonable efforts, St. Mary Land &
Exploration Company has been unable to obtain a reissued report of Arthur
Andersen LLP for inclusion with this Form 10-K, and in reliance on Rule 2-02(e)
of Regulation S-X promulgated by the SEC is including a copy of the previously
issued report with this Form 10-K.

                                      F-2



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          ST. MARY LAND &amp; EXPLORATION COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
                                                                      December 31,
                                                            -----------------------------
                                ASSETS                          2002             2001
                                                            ------------     ------------
Current assets:
     Cash and cash equivalents                                 $  11,154        $   4,116
     Short-term investments                                        1,933                -
     Accounts receivable                                          35,399           46,484
     Prepaid expenses and other                                    6,510            2,337
     Accrued derivative asset                                          -            8,194
     Refundable income taxes                                       1,031           11,061
     Deferred income taxes                                         3,520               29
                                                            ------------     ------------
          Total current assets                                    59,547           72,221
                                                            ------------     ------------

Property and equipment (successful efforts
   method), at cost:
     Proved oil and gas properties                               683,752          518,912
     Less accumulated depletion, depreciation
       and amortization                                         (263,436)        (216,288)
     Unproved oil and gas properties, net of
       impairment allowance of $8,865 in 2002
       and $8,908 in 2001                                         47,984           53,054
     Other property and equipment, net of
       accumulated depreciation of $3,586 in
       2002 and $3,120 in 2001                                     3,639            3,252
                                                            ------------     ------------
                                                                 471,939          358,930
                                                            ------------     ------------

                                                            ------------     ------------
Other noncurrent assets                                            5,653            5,838
                                                            ------------     ------------

                                                            ------------     ------------
Total Assets                                                   $ 537,139        $ 436,989
                                                            ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued expenses                     $  48,790        $  34,858
     Accrued derivative liability                                  8,707                -
     Deferred income taxes                                             -            3,363
                                                            ------------     ------------
          Total current liabilities                               57,497           38,221
                                                            ------------     ------------

Noncurrent liabilities:
     Long-term credit facility                                    14,000           64,000
     Convertible notes                                            99,601                -
     Deferred income taxes                                        60,156           47,685
     Other noncurrent liabilities                                  5,727              255
                                                            ------------     ------------
          Total noncurrent liabilities                           179,484          111,940
                                                            ------------     ------------

Commitments and contingencies (Notes 1,6,7,8)

                                                            ------------     ------------
Minority interest                                                    645              711
                                                            ------------     ------------

Stockholders' equity:
     Common stock, $0.01 par value: authorized
       -100,000,000 shares; issued - 28,983,110
       shares in 2002 and 28,779,808 shares in
       2001; outstanding - 27,973,210 shares in
       2002 and 27,769,908 shares in 2001                            290              288
     Additional paid-in capital                                  140,688          137,384
     Treasury stock - at cost: 1,009,900 shares
       in 2002 and 2001                                          (16,210)         (16,210)
     Retained earnings                                           182,512          157,739
     Accumulated other comprehensive income
       (loss)                                                     (7,767)           6,916
                                                            ------------     ------------
          Total stockholders' equity                             299,513          286,117
                                                            ------------     ------------
Total Liabilities and Stockholders' Equity                     $ 537,139        $ 436,989
                                                            ============     ============

                   The accompaying notes are an integral part
                  of these consolidated financial statements.

                                      F-3



            ST. MARY LAND &amp; EXPLORATION COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


                                                                    For the Years Ended December 31,
                                                            ----------------------------------------------
                                                                2002             2001             2000
                                                            ------------     ------------     ------------
Operating revenues:
     Oil and gas production                                    $ 185,670        $ 203,973        $ 188,407
     Gain (loss) on sale of proved properties                     (2,633)             367            3,404
     Marketed gas revenue                                          8,399              420                -
     Other oil and gas revenue                                       682            2,166            1,421
     Derivative gain                                               3,188                -                -
     Other revenues                                                1,088              543            2,434
                                                            ------------     ------------     ------------
          Total operating revenues                               196,394          207,469          195,666
                                                            ------------     ------------     ------------

Operating expenses:
     Oil and gas production                                       50,839           55,000           38,461
     Depletion, depreciation and amortization                     54,432           51,346           40,129
     Exploration                                                  19,501           19,518            9,633
     Impairment of proved properties                                   -              820            4,449
     Abandonment and impairment of unproved
       properties                                                  2,446            3,865            1,841
     General and administrative                                   14,299           11,762           11,166
     Derivative loss                                                   -            1,573                -
     Marketed gas system operating expense                         7,982              420                -
     Minority interest and other                                   1,206            1,253            1,437
                                                            ------------     ------------     ------------
          Total operating expenses                               150,705          145,557          107,116
                                                            ------------     ------------     ------------

Income from operations                                            45,689           61,912           88,550

Nonoperating income (expense):
     Interest income                                                 758              466              897
     Interest expense                                             (3,868)             (90)            (160)
                                                            ------------     ------------     ------------

Income before income taxes                                        42,579           62,288           89,287
Income tax expense                                                15,019           21,829           33,667
                                                            ------------     ------------     ------------

Net income                                                     $  27,560        $  40,459        $  55,620
                                                            ============     ============     ============

Basic net income per common share                              $    0.99        $    1.45        $    2.00
Diluted net income per common share                            $    0.97        $    1.42        $    1.97

Basic weighted average shares outstanding                         27,856           27,973           27,781
Diluted weighted average shares outstanding                       28,391           28,555           28,271

                   The accompaying notes are an integral part
                   of these consolidated financial statements.

                                      F-4



            ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                      (In thousands, except share amounts)


                                                                                                      Accumulated
                                           Common Stock    Additional               Treasury Stock       Other        Total
                                       -------------------  Paid-in    Retained  ------------------- Comprehensive Stockholders'
                                         Shares     Amount  Capital    Earnings    Shares    Amount      Income       Equity
                                       ---------- -------- ---------- ---------- ---------- -------- ------------- -------------

Balances, December 31, 1999            27,893,910  $   279  $ 123,974  $  67,230   (365,600) $ 2,995) $        284  $    188,772

Comprehensive income:
  Net Income                                    -        -          -     55,620          -        -             -        55,620
  Unrealized net loss on marketable
    equity securities available for
    sale                                        -        -          -          -          -        -          (143)         (143)                                                                                                                        ------------
Total comprehensive income                                                                                                55,477                                                                                                                        ------------
Cash dividends, $ 0.10 per share                -        -          -     (2,775)         -        -             -        (2,775)
Treasury stock purchases                        -        -          -          -    (30,000)    (344)            -          (344)
Issuance for Employee Stock
  Purchase Plan                            32,296        -        311          -          -        -             -           311
ESPP disqualified distribution                  -        -          3          -          -        -             -             3
Sale of common stock, including
  income tax  benefit of stock
  option exercises                        619,220        6      8,597          -          -        -             -         8,603
Directors' stock compensation               8,400        1         88          -          -        -             -            89
                                       ---------- -------- ---------- ---------- ---------- -------- ------------- -------------

Balances, December 31, 2000            28,553,826  $   286  $ 132,973  $ 120,075   (395,600)$ (3,339) $        141  $    250,136

Comprehensive income:
  Net Income                                    -        -          -     40,459          -        -             -        40,459
  Unrealized net loss on marketable
    equity securities available for
    sale                                        -        -          -          -          -        -          (132)         (132)
  Adoption of SFAS No. 133                                                                                 (28,587)      (28,587)
  Reclass to earnings                           -        -          -          -          -        -        21,102        21,102
  Change in derivative instrument
    fair value                                  -        -          -          -          -        -        14,392        14,392                                                                                                                 ------------
Total comprehensive income                                                                                                47,234                                                                                                                        ------------
Cash dividends, $ 0.10 per share                -        -          -     (2,795)         -        -             -        (2,795)
Treasury stock purchases                        -        -          -          -   (614,300) (12,871)            -       (12,871)
Issuance for Employee Stock
  Purchase Plan                            29,772        -        575          -          -        -             -           575
Sale of common stock, including
  income tax  benefit of stock
  option exercises                        187,810        2      3,598          -          -        -             -         3,600
Directors' stock compensation               8,400        -        238          -          -        -             -           238
                                       ---------- -------- ---------- ---------- ---------- -------- ------------- -------------

Balances, December 31, 2001            28,779,808  $   288  $ 137,384  $ 157,739 (1,009,900)$(16,210) $      6,916  $    286,117
                                       ========== ======== ========== ========== ========== ======== ============= =============

Comprehensive income:
  Net Income                                    -        -          -     27,560          -        -             -        27,560
  Unrealized net loss on marketable
    equity securities available for
    sale                                        -        -          -          -          -        -          (725)         (725)
  Reclass to earnings                           -        -          -          -          -        -         1,447         1,447
  Change in derivative instrument
    fair value                                  -        -          -          -          -        -       (14,644)      (14,644)
  Minimum pension liability
    adjustment                                  -        -          -          -          -        -          (761)         (761)                                                                                                                       ------------
Total comprehensive income                                                                                                12,877                                                                                                                       ------------
Cash dividends, $ 0.10 per share                -        -          -     (2,787)         -        -             -        (2,787)
Issuance for Employee Stock
  Purchase Plan                            18,217        -        344          -          -        -             -           344
ESPP disqualified distribution                  -        -         21          -          -        -             -            21
Sale of common stock, including
  income tax  benefit of stock
  option exercises                        177,085        2      2,743          -          -        -             -         2,745
Accelerated vesing of retiring
  director options                              -        -         52          -          -        -             -            52
Directors' stock compensation               8,000        -        144          -          -        -             -           144
                                       ---------- -------- ---------- ---------- ---------- -------- ------------- -------------

Balances, December 31, 2002            28,983,110  $   290  $ 140,688  $ 182,512 (1,009,900)$(16,210) $     (7,767) $    299,513
                                       ========== ======== ========== ========== ========== ======== ============= =============

                   The accompaying notes are an integral part
                   of these consolidated financial statements.

                                       F-5



                                 ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                    (In thousands)

                                                                      For the Years Ended December 31,
                                                            ----------------------------------------------
                                                                2002             2001             2000
                                                            ------------     ------------     ------------
Reconciliation of net income to net cash
     provided by operating activities:
  Net income                                                 $    27,560      $    40,459      $    55,620
  Adjustments to reconcile net income to net
         cash provided by operating
         activities:
    (Gain) loss on sale of proved properties                       2,633             (367)          (3,404)
    Gain on sale of KMOC stock                                      (836)               -           (2,156)
    Depletion, depreciation and amortization                      54,432           51,346           40,129
    Impairment of proved properties                                    -              820            4,449
    Abandonment and impairment of unproved
      properties                                                   2,446            3,865            1,841
    Unrealized derivative (gain) loss                                373            1,573                -
    Deferred income taxes                                         14,633           23,726           21,348
    Exploratory dry hole expense                                   7,677            9,028              789
    Minority interest and other                                       40           (1,327)           1,260
                                                            ------------     ------------     ------------
                                                                 108,958          129,123          119,876
Changes in current assets and liabilities:
    Accounts receivable                                           11,085             (629)         (23,138)
    Prepaid expenses and other                                    (4,173)            (664)             228
    Refundable income taxes                                       10,030          (11,061)              26
    Accounts payable and accrued expenses                         15,992           10,752           (4,652)
    Current deferred income taxes                                   (183)             (29)             (73)
                                                            ------------     ------------     ------------
Net cash provided by operating activities                        141,709          127,492           92,267
                                                            ------------     ------------     ------------

Cash flows from investing activities:
    Proceeds from sale of oil and gas properties                   1,624            4,771            3,573
    Capital expenditures                                         (97,257)        (131,680)         (65,241)
    Acquisition of oil and gas properties                        (87,466)         (39,124)         (52,076)
    Proceeds from distribution and sale of
      KMOC stock                                                   3,114            6,960                -
    Deposits to short term investments
      available-for-sale                                         (13,523)               -                -
    Receipts from short term investments
      available-for-sale                                          12,538                -                -
    Other                                                             39               (2)             876
                                                            ------------     ------------     ------------
Net cash used in investing activities                           (180,931)        (159,075)        (112,868)
                                                            ------------     ------------     ------------

Cash flows from financing activities:
    Proceeds from long-term debt                                  37,400          147,050           45,050
    Repayment of long-term debt                                  (87,400)        (105,050)         (36,050)
    Proceeds from convertible debt                                96,657                -                -
    Proceeds from sale of common stock                             2,390            2,746            7,143
    Repurchase of common stock                                         -          (12,871)            (344)
    Dividends paid                                                (2,787)          (2,795)          (2,775)
    Other                                                              -                -                1
                                                            ------------     ------------     ------------
Net cash provided by financing activities                         46,260           29,080           13,025
                                                            ------------     ------------     ------------

Net change in cash and cash equivalents                            7,038           (2,503)          (7,576)
Cash and cash equivalents at beginning of
    period                                                         4,116            6,619           14,195
                                                            ------------     ------------     ------------

Cash and cash equivalents at end of period                   $    11,154      $     4,116      $     6,619
                                                            ============     ============     ============

                   The accompaying notes are an integral part
                   of these consolidated financial statements.

                                       F-6



            ST. MARY LAND &amp; EXPLORATION COMPANY AND SUBSIDIARIES
          CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Supplemental schedule of additional cash flow information and noncash
activities:
                                                                   For the Years Ended December 31,
                                                            ----------------------------------------------
                                                                2002             2001             2000
                                                            ------------     ------------     ------------
                                                                            (in thousands)

   Cash paid for interest, including amounts capitalized     $     2,498      $       764      $       916

   Cash paid (received) for income taxes                            (550)          11,205               92



   In June 2002 the Company issued 800 shares of common stock to a director and
   recorded compensation expense of $14,763.

   In January 2002 the Company issued 7,200 shares of common stock to its
   directors and recorded compensation expense of $129,683.

   In April 2002 the Company accepted 9,472,562 shares of common stock in
   Constellation Copper Corporation ("Constellation", formerly known as Summo
   Minerals Corporation) in lieu of cash payment for the relief of a $1,400,000
   loan and $15,311 in interest due to the Company.

   In January 2001 the Company issued 8,400 shares of common stock to its
   directors and recorded compensation expense of $237,852.

   In June 2000 the Company received equipment valued at $1,202,000 as
   partial proceeds for property sold.

   In January 2000 the Company issued 8,400 shares of common stock to its
   directors and recorded compensation expense of $88,368.



                   The accompaying notes are an integral part
                   of these consolidated financial statements.

                                       F-7




            ST. MARY LAND & EXPLORATION COMPANY AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2002

1.  Summary of Significant Accounting Policies

    Description of Operations

         St. Mary Land &  Exploration  Company ("St. Mary" or the "Company")
is an  independent  energy  company  engaged  in the  exploration,  development,
acquisition  and  production  of  natural  gas  and  crude  oil.  The  Company's
operations are conducted entirely in the United States.

    Basis of Presentation

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  its   wholly-owned   subsidiaries.   Subsidiaries   that  are  not
wholly-owned are accounted for using full  consolidation  with minority interest
or by the equity or cost method as  appropriate.  All  significant  intercompany
accounts and transactions have been eliminated.

    Stock Splits

         In July 2000 St. Mary's Board of Directors approved a two-for-one stock
split  effected in the form of a stock dividend  whereby one  additional  common
share of stock was  distributed  for each common  share  outstanding.  The stock
split was  distributed on September 5, 2000, to shareholders of record as of the
close of business on August 21,  2000.  All share and per share  amounts for all
periods presented herein have been restated to reflect this stock split.

    Cash and Cash Equivalents

         The Company considers all highly liquid  investments  purchased with an
initial  maturity of three months or less to be cash  equivalents.  The carrying
value of cash and cash equivalents approximates fair value due to the short-term
nature of these instruments.

    Short-term Investments

         The  Company's  short-term  investments  consist  primarily  of  equity
securities  and  investment-grade  marketable  debt,  which  are  classified  as
available-for-sale  or held-to-maturity.  Securities which have been categorized
as  available-for-sale  are stated at fair value based on quoted market  prices.
Debt  securities that the Company has the ability and intent to hold to maturity
are accounted for as  held-to-maturity  securities  and are carried at amortized
cost.

    Concentration of Credit Risk

         Substantially  all of the Company's  receivables are within the oil and
gas industry,  primarily from  purchasers of oil and gas and from joint interest
owners. Although diversified within many companies,  collectability is dependent
upon the general  economic  conditions of the industry.  The receivables are not
collateralized, and to date the Company has had minimal bad debts.

         The Company  has  accounts  with  separate  banks in Denver,  Colorado;
Shreveport,  Louisiana;  Tulsa, Oklahoma;  Lafayette,  Louisiana;  and Billings,
Montana. At December 31, 2002 and 2001, the Company had $4,881,000 and


                                      F-8


$6,576,000  respectively,  invested  in money  market  funds,  including  margin
accounts  consisting of corporate  commercial paper,  repurchase  agreements and
U.S.  Treasury  obligations.  The Company's  policy is to invest in highly rated
instruments  and to limit  the  amount  of credit  exposure  at each  individual
institution.

    Oil and Gas Producing Activities

         The Company follows the successful efforts method of accounting for its
oil  and  gas  properties.   Under  this  method  of  accounting,  all  property
acquisition costs and costs of exploratory and development wells are capitalized
when  incurred,  pending  determination  of  whether  the well has found  proved
reserves.  If an exploratory  well does not find proved  reserves,  the costs of
drilling  the well are  charged  to  expense.  Exploratory  dry hole  costs  are
included  in cash  flows  from  investing  activities  within  the  consolidated
statements of cash flows. The costs of development wells are capitalized whether
productive or nonproductive.

         Geological and geophysical costs on exploratory prospects and the costs
of carrying and  retaining  unproved  properties  are  expensed as incurred.  An
impairment  allowance  is  provided  on a  property-by-property  basis  when the
Company determines that the unproved property will not be developed.  Depletion,
depreciation  and amortization  ("DD&A") of capitalized  costs of proved oil
and gas  properties  is  provided on a  field-by-field  basis using the units of
production method based upon proved reserves.  The computation of DD&A takes
into  consideration  restoration,  dismantlement  and abandonment  costs and the
anticipated proceeds from equipment salvage. The restoration,  dismantlement and
abandonment  costs  for  onshore  properties  are  expected  to be offset by the
residual value of lease and well equipment.  The Company had a recorded offshore
abandonment  liability of  $9,100,000  as of December  31, 2002,  based on total
expected  abandonment  costs of $11,700,000  and a liability of $9,500,000 as of
December 31, 2001 based on total expected abandonment costs of $10,251,000. This
liability  is  included in  accumulated  DD&A  on the  consolidated  balance
sheets.  The Company  recorded  $204,000,  $313,000 and  $1,988,000  of offshore
abandonment  liability accretion as part of DD&A expense in the consolidated
statements of operations for the years ended  December 31, 2002,  2001 and 2000,
respectively.

         The Company reviews its long-lived  assets for impairments  when events
or changes in circumstances  indicate that an impairment may have occurred.  The
impairment  test  compares  the expected  undiscounted  future net revenues on a
field-by-field  basis with the related net capitalized  costs at the end of each
period. Expected future cash flows are calculated on all proved reserves using a
15% discount rate and escalated  prices.  When the net capitalized  costs exceed
the undiscounted  future net revenue of a property,  the cost of the property is
written down to fair value,  which is  determined  using  discounted  future net
revenues. During 2002, 2001 and 2000 the Company recorded impairment charges for
proved properties of $-0-, $820,000 and $4,449,000, respectively.

    Sales of Producing and Nonproducing Properties

         The sale of a partial interest in a proved property is accounted for as
normal  retirement,  and no gain or loss is recognized as long as this treatment
does not significantly affect the  unit-of-production  amortization rate. A gain
or loss is  recognized  for all  other  sales  of  producing  properties  and is
included in the results of operations.

         The sale of a partial interest in an unproved property is accounted for
as a recovery of cost when substantial  uncertainty exists as to recovery of the
cost  applicable to the interest  retained.  A gain on the sale is recognized to
the extent that the sales price exceeds the carrying amount of the unproved
property.  A gain or loss is  recognized  for all  other  sales of  nonproducing
properties and is included in the results of operations.

                                      F-9


    Other Property and Equipment

         Other property and equipment is recorded at cost. Costs of renewals and
improvements  that  substantially  extend  the  useful  lives of the  assets are
capitalized. Maintenance and repairs are expensed when incurred. Depreciation is
provided using the  straight-line  method over the estimated useful lives of the
assets from 3 to 15 years.  Gains and losses on  dispositions  of other property
and equipment are included in the results of operations.

    Gas Balancing

         The Company uses the sales method to account for gas imbalances.  Under
this  method,  revenue  is  recorded  on the basis of gas  actually  sold by the
Company.  The Company  records revenue for its share of gas sold by other owners
that  cannot  be  volumetrically  balanced  in the  future  due to  insufficient
remaining reserves.  Related receivables totaling $898,000 at December 31, 2002,
and $984,000 at December 31, 2001,  are included in other  noncurrent  assets in
the accompanying  balance sheets.  The Company also reduces revenue for gas sold
by the  Company  that  cannot be  volumetrically  balanced  in the future due to
insufficient remaining reserves.  Related payables totaling $531,000 at December
31, 2002,  and $353,000 at December 31, 2001,  are included in other  noncurrent
liabilities  in  the  accompanying   balance  sheets.  The  Company's  remaining
overproduced  and  underproduced  gas balancing  positions are considered in the
Company's  proved oil and gas reserves (see Note 11 - Disclosures  About Oil and
Gas Producing Activities).

    Derivative Financial Instruments

         The  Company  seeks to protect  its rate of return on  acquisitions  of
producing  properties,  drilling  prospects and other production by hedging cash
flows when the economic  criteria from its evaluation and pricing model indicate
it would be appropriate.  The Company intends for these  derivative  instruments
used for this  purpose to be  designated  as and  qualify  as cash flow  hedging
instruments under Statement of Financial  Accounting Standards ("SFAS") No. 133.
Management's  strategy  is  to  hedge  cash  flows  from  investments  currently
requiring  a gas  price in excess of $3.25 per Mcf and an oil price in excess of
$22.50  per Bbl in order to meet  minimum  rate-of-return  criteria.  Management
reviews these hedging  parameters on a quarterly  basis.  The Company  generally
limits its aggregate hedge position to no more than 50% of its total  production
but will hedge larger percentages of total production in certain  circumstances.
The  Company  seeks to minimize  basis risk and indexes the  majority of its oil
hedges to NYMEX  prices and the  majority of its gas hedges to various  regional
index prices  associated  with pipelines in proximity to the Company's  areas of
gas production.

         The   Company's   hedge   positions   are   diversified   with  various
counterparties,  and the Company  requires that such  counterparties  have clear
indications of current  financial  strength (See Note 10 - Derivative  Financial
Instruments for additional discussion of derivatives).

    Income Taxes

         Deferred  income taxes are provided on the  difference  between the tax
basis  of an  asset  or  liability  and its  carrying  amount  in the  financial
statements.  This  difference  will result in taxable  income or  deductions  in
future years when the reported  amount of the asset or liability is recovered or
settled, respectively.

                                      F-10


    Earnings Per Share

         Basic net income per common  share of stock is  calculated  by dividing
net income by the  weighted  average of common  shares  outstanding  during each
year. Diluted net income per common share of stock is calculated by dividing net
income by the weighted  average of common shares  outstanding and other dilutive
securities.   Potentially   dilutive   securities  of  the  Company  consist  of
outstanding options to purchase the Company's common stock and shares associated
with the convertible  notes that were issued in 2002. The  outstanding  dilutive
securities  related to  in-the-money  options for the years ended  December  31,
2002,  2001 and 2000 were 534,610,  582,313 and 490,288,  respectively.  Options
that were  out-of-the-money  and therefore not  considered in the diluted income
per share  calculation  were  1,539,227,  625,492,  and -0- for the years  ended
December 31, 2002, 2001 and 2000.  Shares  associated with the convertible notes
are accounted for using the if-converted method.  Potentially dilutive shares of
3,076,922 in 2002 that related to the convertible notes were not included in the
calculation of diluted net income per share because they were anti-dilutive.

    Stock-Based Compensation

         At December 31, 2002 the Company had stock-based employee  compensation
plans  that  are  more  fully  described  in Note 7. The  Company  accounts  for
stock-based  compensation  using the intrinsic value recognition and measurement
principles prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees"  ("APB No. 25") and related  interpretations.  No
stock-based  employee  compensation  expense is  reflected  in net income as all
options  granted  under those  plans had an  exercise  price equal to the market
value of the underlying  common stock on the date of grant.  The following table
illustrates  the effect on net income and  earnings per share if the Company had
applied the fair value recognition  provisions of SFAS No. 123,  "Accounting for
Stock-Based Compensation," to stock-based employee compensation.


                                                                Pro Forma for the Years
                                                                   Ended December 31,
                                                     -------------------------------------------
                                                        2002              2001            2000
                                                        ----              ----            ----
                                                         (In thousands, except per share amounts)
         Net income
                           As reported               $  27,560        $  40,459        $  55,620
                           Pro forma                 $  22,894        $  37,569        $  52,515
         Basic earnings per share
                           As reported               $     .99        $    1.45        $    2.00
                           Pro forma                 $     .82        $    1.34        $    1.89
         Diluted earnings per share
                           As reported               $     .97        $    1.42        $    1.97
                           Pro forma                 $     .81        $    1.32        $    1.86


         For purposes of pro forma disclosures, the estimated fair values of the
options are amortized to expense over the options' vesting periods.  The effects
of  applying  SFAS  No.  123 in the pro  forma  disclosure  are not  necessarily
indicative  of actual  future  amounts.  Additional  awards in future  years are
anticipated.


    Comprehensive Income

         Comprehensive  income consists of net income,  and unrealized gains and
losses on marketable equity securities held for sale, the effective component of
derivative  instruments  classified  as cash flow  hedges,  and accrued  pension
benefit obligation in excess of plan assets.  Comprehensive  income is presented

                                      F-11


net of income taxes in the consolidated  statements of stockholders'  equity and
comprehensive income.

    Major Customers

         During 2002 no customer individually accounted for more than 10% of the
Company's  total  oil and gas  production  revenue.  During  2001 two  customers
individually  accounted for 12.0% and 11.3% of the  Company's  total oil and gas
production  revenue.  During  2000  one  customer  accounted  for  22.3%  of the
Company's total oil and gas production revenue.

    Industry Segment and Geographic Information

         The Company operates in one industry segment, which is the exploration,
development  and  production  of  natural  gas  and  crude  oil,  and all of the
Company's  operations  are  conducted in the United  States.  Consequently,  the
Company currently reports as a single industry segment.

                                      F-11



    Use of Estimates in the Preparation of Financial Statements

         The  preparation of financial  statements in conformity with accounting
principles  generally accepted in the United States requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts of oil and gas
reserves,  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.

    Recently Issued Accounting Standards

         In July 2001 the Financial  Accounting  Standards Board ("FASB") issued
SFAS No. 143,  "Accounting  for Asset  Retirement  Obligations."  This statement
requires companies to recognize the fair value of an asset retirement  liability
in the financial statements by capitalizing that cost as part of the cost of the
related  long-lived  asset.  The  asset  retirement  liability  should  then  be
allocated to expense by using a systematic and rational method. The statement is
effective January 1, 2003. The Company has not determined the impact of adoption
of this statement.

         In April  2002 the  FASB  issued  SFAS  No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections."  This Statement  rescinds SFAS No. 4, "Reporting  Gains and Losses
from  Extinguishment of Debt", and an amendment of that Statement,  SFAS No. 64,
"Extinguishments  of  Debt  Made to  Satisfy  Sinking-Fund  Requirements."  This
Statement also rescinds SFAS No. 44,  "Accounting for Intangible Assets of Motor
Carriers."  This  Statement  amends  SFAS No. 13,  "Accounting  for  Leases," to
eliminate an inconsistency  between the required  accounting for  sale-leaseback
transactions and the required  accounting for certain lease  modifications  that
have  economic  effects that are similar to  sale-leaseback  transactions.  This
Statement  also  amends  other  existing  authoritative  pronouncements  to make
various technical corrections, clarify meanings, or describe their applicability
under changed  conditions.  The provisions of this Statement shall be applied in
fiscal  years  beginning  after May 15,  2002.  We currently do not believe that
adoption of this Statement will have an impact on the Company.

         In June 2002 the FASB issued SFAS No. No.  146,  "Accounting  for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies  Emerging  Issues Task Force ("EITF")  Issue No. 94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an

                                      F-12


Activity (including Certain Costs Incurred in a Restructuring)."  The provisions
of this  Statement  are  effective  for  exit or  disposal  activities  that are
initiated  after  December  31, 2002,  with early  application  encouraged.  The
Company does not believe that  adoption of this  Statement  will have a material
impact on the financial statements.

         In  December  2002  the  FASB  issued  SFAS No.  148,  "Accounting  for
Stock-Based  Compensation  -- Transition  and  Disclosure:  an amendment of FASB
Statement  No.  123."  This  Statement  amends  SFAS No.  123,  "Accounting  for
Stock-Based  Compensation",  to provide  alternative methods of transition for a
voluntary  change to the fair value based method of accounting  for  stock-based
employee  compensation.  In  addition,  this  Statement  amends  the  disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim  financial  statements  about the method of accounting  for  stock-based
employee compensation and the effect of the method used on reported results. The
Statement is effective  for financial  statements  for fiscal years ending after
December  15,  2002.  The  Company  will  continue  to account  for  stock-based
compensation  using  the  methods  detailed  in  the  stock-based   compensation
accounting policy.

2.  Accounts Receivable

         Accounts receivable are composed of the following:

                                                             December 31,
                                                      -------------------------
                                                         2002           2001
                                                      ----------     ----------
                                                            (In thousands)

         Accrued oil and gas sales                       $25,962        $29,041
         Due from joint interest owners                    8,920         17,042
         Other                                               517            401
                                                      ----------     ----------
         Total accounts receivable                       $35,399        $46,484
                                                      ==========     ==========

3.  Acquisitions

         On December 3, 2002, the Company  completed the  acquisition of oil and
gas  properties  located in Montana,  North Dakota and Wyoming  from  Burlington
Resources Oil &  Gas Company LP. The Company paid  $69,469,000 in cash after
normal price adjustments.  The Company utilized a portion of its existing credit
facility to fund the  acquisition,  and the  transaction  was accounted for as a
purchase.

         On November 29, 2001, the Company  completed the acquisition of oil and
gas properties located in Montana,  North Dakota and Wyoming from Choctaw II Oil
and  Gas,  LTD.  The  Company  paid  $40,526,000  in  cash  after  normal  price
adjustments.  The Company  utilized a portion of its existing credit facility to
fund the acquisition, and the transaction was accounted for as a purchase.

         On December 28, 2000, the Company  completed the acquisition of oil and
gas  properties  primarily  located in the  Anadarko  Basin of Oklahoma  from JN
Exploration  and Production  Limited  Partnership and affiliates for $31,613,000
million in cash after normal purchase price  adjustments.  The Company  utilized
cash  on hand  and a  portion  of its  existing  credit  facility  to  fund  the
acquisition. The transaction was accounted for as a purchase.

                                      F-13


4.  Income Taxes

         The provision for income taxes consists of the following:

                                               For the Years Ended December 31,
                                               --------------------------------
                                                   2002      2001       2000
                                               ---------- ---------- ----------
                                                            (in thousands)
         Current Taxes:
              Federal                           $     719  $   1,114  $  11,194

              State                                   569        620      1,181

         Deferred taxes                            13,731     20,095     21,292
                                               ---------- ---------- ----------
         Total income tax expense               $  15,019  $  21,829  $  33,667
                                               ========== ========== ==========

         The above taxes from continuing operations are net of alternative fuels
credits (Internal Revenue Code Section 29) of $167,000 in 2002, $185,000 in 2001
and  $79,000 in 2000.  Current  federal tax does not reflect the tax benefit for
deductions from stock option exercises of $719,000 in 2002, $930,000 in 2001 and
$1,771,000 in 2000 because the benefit is included in additional paid-in capital
in the consolidated  balance sheets. The net federal taxes payable for the years
ending  December 31,  2002,  2001 and 2000 are $-0-,  $184,000  and  $9,423,000,
respectively.

         The components of the net deferred tax liability are as follows:

                                                                               December 31,
                                                                          ---------------------
                                                                             2002       2001
                                                                          ---------- ----------
                                                                              (in thousands)
         Deferred Tax Liabilities
              Oil and gas properties                                       $  71,448  $  55,819
              Derivative Instruments                                               -      3,903
              Other                                                               62        147
                                                                          ---------- ----------
         Total deferred tax liabilities                                       71,510     59,869
                                                                          ---------- ----------

         Deferred Tax Assets
              Amounts included in Other Comprehensive Income                   4,181          -
              State tax net operating loss carryforward                        4,042      3,638
              Federal net operating loss carryforward                          3,142          -
              Deferred capital loss                                            1,703      1,715
              Other, primarily employee benefits                               1,325      1,716
              State and federal income tax benefit                               775      3,497
              Charitable contributions carryforward                              218          -
              Alternative minimum tax credit carryforward                        215        184
                                                                          ---------- ----------
         Total deferred tax assets                                           15,601      10,750
         Valuation allowance                                                  (727)      (1,929)
                                                                          ---------- ----------
         Net deferred tax assets                                              14,874      8,821
                                                                          ---------- ----------

         Total net deferred tax liabilities                                   56,636     51,048
         Current deferred income tax assets (liabilities)                      3,520     (3,363)
                                                                          ---------- ----------
         Non-current net deferred tax liabilities                          $  60,156  $  47,685
                                                                          ========== ==========

         Current refundable income tax                                     $   1,031  $  11,061
                                                                          ========== ==========

                                      F-14



         In  accordance  with  SFAS  No.  109  the  Company   records   purchase
adjustments  to its long-term  deferred  income tax  liability  accounts to more
closely align book and tax basis at the time of acquisition.  These  adjustments
mitigate the effect of deferred  income tax expense or reduced  deferred  income
tax  benefit on future  net income  before  income  tax from  acquisitions  that
utilize the purchase method for accounting  principles generally accepted in the
United  States  and  are  considered  to be  tax-free  basis  transfers  for tax
accounting.  During 1999 the Company adjusted its long-term  deferred income tax
liability  account  for a  $667,000  increase  relating  to its Nance  Petroleum
Corporation  ("Nance") stock acquisition and recorded a $10,426,000 decrease for
its King Ranch  Energy  ("KRE")  stock  acquisition  as  Nance's  book basis was
greater than its tax basis, and KRE's tax basis was greater than its book basis.
The  Company  has been  recording  adjustments  to reflect  the  utilization  of
additional  tax  benefits  of KRE by  King  Ranch,  Inc.  on it's  1999  Federal
consolidated income tax return and to reflect the utilization of tax benefits or
liabilities on its own federal  consolidated  returns since the original amounts
were recorded.

         At  December  31,  2002,  the  Company  had  state net  operating  loss
carryforwards of approximately $61,000,000,  which expire between 2003 and 2021.
The Company's valuation allowance relates to those state net operating loss
carryforwards  that the  Company  anticipates  will  expire  before  they can be
utilized.  The  net  change  in  valuation  allowance  in 2002  results  from an
evaluation of state net operating loss carryforwards that led to a conclusion by
the Company that more of the  carryforwards  will be offset by  reversing  state
temporary differences, projections of future taxable income and individual state
tax planning strategies before they expire than was anticipated in prior years.

         Federal  income  tax  expense  differs  from the  amount  that would be
provided by applying the statutory U.S. Federal income tax rate to income before
income taxes for the following reasons:

                                                          For the Years Ended December 31,
                                                          --------------------------------
                                                              2002      2001      2000
                                                          --------------------------------
                                                                   (in thousands)

         Federal statutory taxes                           $  14,477   $ 20,420  $  30,267
         Increase (reduction) in taxes resulting from:
              State taxes (net of Federal benefit)             2,092      2,017      4,342
              Statutory depletion                               (218)      (238)       (71)
              Alternative fuel credits (Section 29)             (167)      (185)       (79)
              Change in valuation allowance                   (1,202)        34       (826)
              Other                                               37       (219)        34
                                                          ---------- ---------- ----------
         Income tax expense from continuing
              operations                                   $  15,019  $ 21,829   $  33,667
                                                          ========== ========== ==========

5.  Long-term Debt and Notes Payable

         In March  2002 the  Company  issued in a private  placement  a total of
$100,000,000  of 5.75% senior  convertible  notes due 2022 (the  "Notes") with a
0.5%   contingent   interest   provision  (see  Note   10-Derivative   Financial
Instruments).  The  contingent  interest  provision  did not apply to St. Mary's
first  interest  payment on September 15, 2002, but it will apply to the payment
due on March 15, 2003.  Interest payments will be made on March 15 and September
15 in subsequent  years. The Company received net proceeds of $96,661,000  after
deducting  the initial  purchasers'  discount and offering  expenses paid by the
Company. The Notes are general unsecured obligations and rank on parity in right
of payment with all existing and future unsecured senior  indebtedness and other

                                      F-15


         general unsecured  obligations.  They are senior in right of payment to
all  future  subordinated  indebtedness.  The  Notes  are  convertible  into the
Company's  common  stock at a conversion  price of $26.00 per share,  subject to
adjustment.  The Company can redeem the Notes with cash in whole or in part at a
repurchase  price  of 100% of the  principal  amount  plus  accrued  and  unpaid
interest (including  contingent  interest) beginning on March 20, 2007. The note
holders have the option of  requiring  the Company to  repurchase  the Notes for
cash at 100% of the principal amount plus accrued and unpaid interest (including
contingent  interest)  upon (1) a change in control of St.  Mary or (2) on March
20, 2007,  March 15,  2012,  and March 15,  2017.  If the note  holders  require
repurchase on March 20, 2007, the Company may elect to pay the repurchase  price
with  cash,  shares of its  common  stock  valued at a  discount  at the time of
repurchase,  or any  combination  of cash and its discounted  common stock.  The
shares of common  stock  used in any  repurchase  will be  discounted  at 95% of
market price if 33% or less of the  repurchase  price is in shares of our common
stock;  otherwise the stock will be discounted at 93% of market value.  St. Mary
is  not  restricted  from  paying  dividends,  incurring  debt,  or  issuing  or
repurchasing  its  securities  under the indenture  for the Notes.  There are no
financial  covenants  in the  indenture.  The Company  used a portion of the net
proceeds  from the  Notes to repay  its  credit  facility  balance  and used the
remaining  net proceeds to fund a portion of its 2002 capital  expenditures.  On
March 25, 2002, the Company entered into a five-year fixed-rate to floating-rate
interest  rate  swap on  $50,000,000  of  Notes.  The  floating  rate  for  each
applicable  six-month  period  was  determined  as  LIBOR  plus  0.36%.  For the
six-month  calculation  period  ending  March 15, 2003 this rate was 2.19%.  The
interest  rate swap  contract was  terminated  on December 3, 2002.  The Company
received  proceeds of $3,952,000 upon termination of the contract and recorded a
derivative  gain of  $3,561,000 in the  statement of  operations.  See Note 10 -
Derivative Financial  Instruments for a discussion of the derivative  accounting
for the interest rate swap.

         On March 4, 2002,  St.  Mary  entered  into an  agreement  to amend the
existing  long-term  revolving  credit  agreement.  The lender may  periodically
re-determine the aggregate borrowing base depending upon the value of St. Mary's
oil and gas properties and other assets.  The accepted  borrowing base was $40.0
million at December 31, 2002,  and the stated  total  borrowing  base was $160.0
million.  The credit  agreement  has a maturity  date of  December  31, 2006 and
includes a revolving period that matures on June 30, 2003.  Quarterly  principal
payments will begin on September  30, 2003.  The amended  agreement  deletes all
reference to and provisions of the short-term  tranche  previously  available to
St. Mary. The Company must comply with certain covenants  including  maintenance
of  stockholders'  equity at a specified  level and  limitations  on  additional
indebtedness. These outstanding balances accrued interest at rates determined by
St. Mary's debt to total capitalization ratio at our option of either:

      Debt to Capitalization Ratio         <30%  =>30%<40%  =>40%<50%     =>50%
      ----------------------------------------------------------------------------------------------

      Option (1)
           LIBOR plus                       1.000%           1.250%           1.375%       1.625%

      Option (2) - The higher of:
           Federal funds rate plus          0.500%           0.500%           0.500%       0.500%

           Prime rate plus                       -                -                -       0.250%

         The debt to total  capitalization  ratio as defined under the agreement
was 27.5% as of December 31, 2002.

         Outstanding  borrowings  under  the  revolving  credit  agreement  were
$14,000,000  and  $64,000,000  as of December  31, 2002 and 2001,  respectively.
Borrowings  under the Notes were  $100,000,000  and $-0- as of December 31, 2002

                                      F-16


and 2001, respectively. The weighted average interest rate paid in 2002 was 4.2%
including  commitment fees paid on the unused portion of the accepted  borrowing
base and  including the effect of the interest  rate swap  contract.  Borrowings
under the facility are secured by a pledge of  collateral  in favor of the banks
and guarantees by subsidiaries.  Such collateral  consists primarily of security
interests in the oil and gas properties of St. Mary and its subsidiaries.

         The Company's  estimated  annual  principal  payments  under the credit
agreement for the next four years are as follows:

                           Years Ending
                           December 31,                 (In thousands)
                        ----------------                 -------------
                               2003                           $ 2,000
                               2004                             4,000
                               2005                             4,000
                               2006                             4,000
                                                         -------------
                              Total                           $14,000
                                                         =============

         In  January  2003,  this line of credit was  closed  and  replaced,  as
described in Note 13, Subsequent Events.

6.   Commitments and Contingencies

         The Company  leases  office space under various  operating  leases with
terms extending as far as May 31, 2012. The Company has a noncancelable sublease
of approximately  $1,685,000 through 2012. Rent expense, net of sublease income,
was $1,082,000,  $839,000 and $782,000 in 2002, 2001 and 2000, respectively. The
Company also leases office equipment under various operating leases.  The annual
minimum lease payments for the next five years are presented below:

                           Years Ending
                           December 31,                 (In thousands)
                         ---------------                 ------------
                               2003                            $1,573
                               2004                             1,327
                               2005                             1,205
                               2006                             1,125
                               2007                               861
                            Thereafter                          3,674
                                                         ------------
                              Total                            $9,724
                                                         ============

7.   Compensation Plans

         The Company has a cash bonus plan that allows  participants  to receive
up to 100% of their aggregate base salary. Any awards under the cash bonus plans
are based on a combination  of Company and individual  performance.  The Company
accrued $2,100,000 for cash bonuses in 2002 that will be paid in 2003,  $170,000
for cash bonuses in 2001 that were paid in 2002, and $1,957,000 for cash bonuses
in 2000 that were paid in 2001.

         Under the Company's net profits  interest bonus plan, oil and gas wells
that are  completed  or acquired  during a year are  designated  as a pool.  Key
employees  designated as  participants  by the Company's  board of directors and
employed by the Company on the last day of that year vest and become entitled to
bonus  payments  after the Company  recovers net revenues  generated by the pool

                                      F-17


equal to 100% of its investment in that pool.  Thereafter,  an amount  generally
equal to 10% of net revenues  generated by the pool will be allocated  among the
participants  and paid on a quarterly basis. The percentage of net revenues from
the pool to be split among the  participants  increases to 20% after the Company
recovers  net  revenues  equal to 200% of its  investment.  The Company  records
estimated  compensation  expense  based on a  number  of  assumptions  including
estimates of oil and gas production,  oil and gas prices, recurring and workover
lease operating expense and a present value discount factor.  The Company uses a
discount  factor to  calculate  present  value  that  reflects  recovery  of its
investment,  the timing of payments to participants and uncertainties associated
with the estimates. The estimates the Company uses will change from year-to-year
based on new  information  and any  change  in  estimated  compensation  will be
recorded in the period that information becomes available.  The Company recorded
estimated  compensation  expense of $5,600,000  in 2002,  $5,259,000 in 2001 and
$877,000 in 2000 relating to the net profits interest bonus plan.

         The Company has a defined  contribution  pension plan  ("401(k)  Plan")
that is subject to the Employee  Retirement  Income  Security  Act of 1974.  The
401(k) Plan allows  eligible  employees  to  contribute  up to 60% of their base
salaries.  The Company  matches each  employee's  contributions  up to 6% of the
employee's  base  salary  and  also  may make  additional  contributions  at its
discretion.  The  Company's  contributions  to the  401(k)  Plan were  $621,000,
$559,000,  and  $412,000 for the years ended  December 31, 2002,  2001 and 2000,
respectively.  No  discretionary  contributions  were made by the Company to the
401(K) Plan in any of these three years.

         In  September  1997 the Board of  Directors  approved the St. Mary Land
&  Exploration Company Employee Stock Purchase Plan ("Stock Purchase Plan"),
which became  effective  January 1, 1998. Under the Stock Purchase Plan eligible
employees  may purchase  shares of the Company's  common stock  through  payroll
deductions  of up to 15% of eligible  compensation.  The  purchase  price of the
stock is 85% of the lower of the fair market  value of the stock on the first or
last day of the purchase period.  The Stock Purchase Plan is intended to qualify
under  Section  423 of the  Internal  Revenue  Code.  The  Company has set aside
1,000,000  shares of its common  stock to be available  for  issuance  under the
Stock  Purchase  Plan.  In 2002,  2001 and 2000  shares  issued  under the Stock
Purchase Plan totaled 18,217, 29,772 and 32,296, respectively. Total proceeds to
the  Company for the  issuance  of these  shares  were  $344,000,  $575,000  and
$311,000 in 2002, 2001 and 2000, respectively. The Company recorded compensation
expense of $21,000, $20,000 and $3,000 in 2002, 2001 and 2000, respectively, due
to  nonqualified  dispositions  of stock  acquired by employees  under the Stock
Purchase Plan.

         In 1996 the Company  established  the St.  Mary Land &  Exploration
Company  Stock  Option  Plan and the St.  Mary Land  &  Exploration  Company
Incentive Stock Option Plan (collectively, the "Option Plans"). The Option Plans
grant  options to  purchase  shares of the  Company's  common  stock to eligible
employees,  contractors,  and  current  and  former  members  of  the  Board  of
Directors. In 2001 the stockholders approved an increase in the number of shares
of the Company's  common stock reserved for issuance under the Option Plans from
3,300,000  shares to  4,300,000  shares.  All options  granted to date under the
Option Plans have been granted at exercise prices equal to the respective market
prices of the Company's common stock on the grant dates.

                                      F-18


         A summary of the status of the Company's Stock Option Plans,  including
the 1990 and 1991 options and changes during the last three years follows:

                                                      For the Years Ended December 31,
                                ------------------------------------------------------------------------------
                                          2002                       2001                      2000
                                -------------------------  ------------------------- -------------------------
                                               Weighted                  Weighted                  Weighted
                                               Average                    Average                   Average
                                               Exercise                  Exercise                  Exercise
                                   Shares       Price        Shares        Price       Shares        Price
                                ------------- -----------  ------------ ------------ ------------ ------------

Outstanding, start of year         2,151,675   $   19.42     1,986,124   $    18.95    1,998,254   $    11.63

Granted                            1,109,541       23.55       397,009        18.86      653,848        33.31
Exercised                            177,085       11.44       187,810        11.57      619,220        11.05
Forfeited                             22,565       25.08        43,648        26.00       46,758        11.74
                                -------------              ------------              ------------
Outstanding, end of year           3,061,566       21.34     2,151,675        19.42    1,986,124        18.95
                                =============              ============              ============

Exercisable, end of year           1,944,382       19.79     1,418,404        17.09    1,150,196        15.00
                                =============              ============              ============

Weighted average fair
     value of options
   granted during the year       $     10.77                $     8.36                $    14.75
                                =============              ============              ============

         A summary of additional  information related to the options outstanding
as of December 31, 2002 follows:

                                           Options Outstanding                    Options Exercisable
                             ------------------------------------------------- ------------------------
                                               Weighted
                                               Average         Weighted                      Weighted
                                               Remaining        Average                      Average
        Range of                 Number       Contractual      Exercise         Number       Exercise
     Exercise Prices          Outstanding        Life            Price       Exercisable      Price
- ----------------------       ------------- ---------------- -------------- -------------- -------------

    $ 9.25  -  $10.25             332,808      4.8 years         $ 9.57        328,776        $ 9.57
     12.38  -   14.69             517,367      6.7 years          12.58        517,367         12.58
     15.93  -   17.50             280,111      7.3 years          16.55        196,353         16.82
     21.19  -   25.00           1,314,209      9.5 years          23.17        430,847         22.83
     33.31  -   33.31             617,071      8.0 years          33.31        471,039         33.31
                             -------------                                 --------------

 Total                          3,061,566      8.0 years          21.34      1,944,382         19.79
                             =============                                 ==============

         SFAS  No.  123  establishes  a fair  value  method  of  accounting  for
stock-based  compensation  plans either through  recognition or disclosure.  The
Company accounts for stock-based  compensation  under APB No. 25 and has elected
to adopt SFAS No. 123 through  compliance with the disclosure  requirements  set
forth in the  Statement.  Because the exercise  price of the Company's  employee
stock  options  equals the market price of the  underlying  stock on the date of
grant,  no  compensation  expense  is  recognized  under APB No.  25.  Pro forma
information  regarding net income and earnings per share is required by SFAS No.

                                      F-19


123 and has been  determined  as if the Company had  accounted  for its employee
stock options under the fair value method of that Statement.

         The fair value of options is  measured  at the date of grant  using the
Black-Scholes  option-pricing model. The fair values of options granted in 2002,
2001 and 2000 were estimated using the following weighted-average assumptions:

                                                       2002      2001       2000
                                                       ----      ----       ----
         Risk free interest rate                      3.76%     4.35%      5.14%
         Dividend yield                               0.43%     0.53%      0.32%
         Volatility Factor of the expected
             market price of the Company's
             common stock                            47.54%    49.79%     47.11%
         Expected life of the options (in years)        5.9       4.8        4.8

         The  Black-Scholes  option  valuation  model was  developed  for use in
estimating  the fair value of traded  options that have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  it
is management's  opinion that the existing  models do not necessarily  provide a
reliable single measure of the fair value of St Mary's employee stock options.




                                      F-20



8.  Pension Benefits

         The Company's employees participate in a non-contributory  pension plan
covering  substantially all employees who meet age and service requirements (the
"Qualified Pension Plan"). The Company also has a supplemental  non-contributory
pension plan covering certain management  employees (the  "Nonqualified  Pension
Plan"). The Company's disclosures about pension benefits are as follows:

                                                        For the Years Ended December 31,
                                                              2002          2001
                                                              ----          ----
                                                                 (In thousands)
     Change in benefit obligations:
        Benefit obligation at beginning of year              $ 5,098      $ 3,054
             Service Cost                                        442          323
             Interest Cost                                       358          317
             Amendments                                          (46)           0
             Actuarial loss                                      409        1,485
             Benefits paid                                       (25)         (81)
                                                            --------     --------
        Benefit obligation at end of year                    $ 6,236      $ 5,098
                                                            ========     ========

     Change in plan assets:
        Fair value of plan assets at beginning of year       $ 2,042      $ 1,775
             Actual return on plan assets                       (255)         (13)
             Employer contribution                               716          361
        Benefits paid                                            (25)         (81)
                                                            --------     --------
        Fair value of plan assets at end of year             $ 2,478      $ 2,042
                                                            ========     ========

     Funded Status                                           $(3,758)     $(3,056)
        Unrecognized net actuarial loss                        2,925        2,326
        Unrecognized prior service cost                          (41)         (20)
                                                            --------     --------
        Accrued benefit cost                                 $  (874)     $  (750)
                                                            ========     ========

                                      F-20


         The Company's  Qualified Pension Plan's accumulated  benefit obligation
was  $3,526,000 at December 31, 2002,  and  $2,646,000 at December 31, 2001. The
accumulated   benefit  obligation   exceeds  plan  assets  by  $1,048,000.   The
tax-adjusted liability of $761,000 was recorded in other comprehensive income at
December 31, 2002.

         The  Company's   Nonqualified   Pension  Plan's   accumulated   benefit
obligation was $853,000 at December 31, 2002, and $685,000 at December 31, 2001.
There are no plan assets in the nonqualified plan due to the nature of the plan.

         Assumptions used in the measurement of the Company's benefit obligation
are as follows:

                                                For the Years Ended December 31,
                                                --------------------------------
                                                      2002          2001
                                                      ----          ----
        Weighted-average assumptions:
             Discount rate                           6.50%          7.25%
             Expected return on plan assets          8.00%          8.00%
             Rate of compensation increase           4.75%          5.00%


                                      F-21



                                                For the Years Ended December 31,
                                                --------------------------------
                                                   2002       2001       2000
                                                   ----       ----       ----
                                                         (In thousands)
        Components of net periodic benefit cost:
             Service cost                         $  442     $  323     $  257
             Interest cost                           358        317        193
             Expected return on plan assets         (146)      (129)      (119)
             Amortization of prior service cost      (25)        (8)        (7)
             Amortization of net actuarial loss      211        188         36
                                                  ------     ------     ------
             Net periodic benefit cost            $  840     $  691     $  360
                                                  ======     ======     ======

         Prior  service costs are  amortized on a  straight-line  basis over the
average  remaining  service period of active  participants.  Gains and losses in
excess of 10% of the greater of the benefit  obligation  and the  market-related
value of assets are  amortized  over the  average  remaining  service  period of
active participants.

9.  Investment in Russian Joint Venture

         In February  2000 St. Mary  exercised  its option to convert its Khanty
Mansiysk Oil  Corporation  ("KMOC")  production  payment  receivable into common
stock of KMOC.  In July 2000 the Company  finalized a  negotiated  value for the
receivable that equated to 21,583 shares of KMOC common stock under the terms of
the original agreement. In December 2000 the Company sold 14,662 of these shares
for proceeds of $6,157,000,  net of transaction  costs and recognized a net gain
of $2,156,000.

         In January  2002 the Company sold its  remaining  shares of KMOC common
stock for proceeds of $2,772,000 and recorded a gain of $838,000.

10. Derivative Financial Instruments

         The  Company  realized  a net  gain of  $878,000  from  its  derivative
contracts for the year ended  December 31, 2002, a net loss of  $22,675,000  for
the year ended  December  31,  2001 and a net loss of  $33,641,000  for the year
ended December 31, 2000.

       The Company's senior  convertible notes contain a provision for payment
of contingent  interest if certain  conditions  are met. Under SFAS No. 133 this
provision  is  considered  an embedded  equity  related  derivative  that is not
clearly  and  closely  related  to the fair  value  of an  equity  interest  and
therefore must be separately  treated as a derivative  instrument.  The value of
the derivative at issuance was $474,000.  This amount was recorded as a decrease
to the convertible  notes payable in the  consolidated  balance sheets.  Of this
amount, $75,000 has been amortized through interest expense.  Derivative gain in
the  consolidated  statements of operations  includes  $341,000 of net loss from
mark-to-market adjustments for this derivative.

         The  Company's  fixed-rate  to  floating  rate  interest  rate  swap on
$50,000,000  of senior  convertible  notes did not  qualify for fair value hedge
treatment  under SFAS No. 133. This contract was entered into on March 25, 2002,
and was closed out on  December  3, 2002.  Derivative  gain in the  consolidated
statement  of  operations  includes  $3,561,000  of net  realized  gain from the
termination of the interest rate swap contract.

                                      F-22


         The following table summarizes derivative instrument activity.

                                                               2002             2001              2000
                                                          --------------- --------------- ---------------
                                                                             Gain (Loss)
Derivative contract settlements included
   in oil and gas production revenues                      $   (2,235,000) $  (21,102,000) $  (33,641,000)
Ineffective portion of hedges qualifying
   for hedge accounting included in
   derivative gain(loss)                                          (32,000)         45,000               -
Non-qualified derivative contracts included
    in derivative gain (loss)                                   3,220,000      (1,618,000)              -
Amortization of contingent interest derivative
    through interest expense                                      (75,000)              -               -
                                                          --------------- --------------- ---------------
                   Total                                   $      878,000  $  (22,675,000) $  (33,641,000)
                                                          =============== =============== ===============

         Including  hedges  entered into since December 31, 2002 the Company has
the following  commodity  swap  contracts in place to hedge cash flow and reduce
the impact of oil and gas price fluctuations:

       Swaps
       -----
                                    Average          Quantity       Average Fixed
              Product            Volumes/month         Type         Contract Price      Duration
       ---------------------------------------------------------------------------------------------

            Natural Gas           1,599,000            MMBtu             $4.35        01/03 - 12/03
            Natural Gas             844,000            MMBtu             $4.04        01/04 - 12/04

                Oil                 206,200            Bbls             $25.94        01/03 - 12/03
                Oil                 144,500            Bbls             $23.71        01/04 - 12/04

       Collars
       -------
                                    Average            Floor            Ceiling
                 Product         Volumes/month         Price             Price          Duration
       ---------------------------------------------------------------------------------------------

            Natural Gas             152,000 MMbtu      $2.50             $5.96        02/03 - 12/03

         This table excludes commodity  positions with Enron North America Corp,
which filed for  bankruptcy  protection in December 2001. A net non-cash gain of
$1,697,000 from these contracts is included in oil and gas production  operating
revenues in the consolidated statements of operations. The Company will amortize
the remaining $49,000 unrealized hedge loss in 2003.

         As noted in the table above, the last of those contracts will expire by
December 31, 2004.  Derivative gain in the consolidated  statement of operations
includes  a  loss  of  $31,000  from  ineffectiveness  related  to  these  hedge
contracts. On December 31, 2002 the estimated fair value of contracts designated
and  qualifying  as cash flow  hedges  under  SFAS No.  133 was a  liability  of
$9,980,000.  The Company will reclassify this amount to gains or losses included
in oil and gas production  operating revenues as the hedged production  quantity
is  produced.  Based on current  prices the net  amount of  existing  unrealized
after-tax loss as of December 31, 2002 to be reclassified from accumulated other
comprehensive  income to oil and gas production  operating  revenues in the next
twelve months would be  $5,461,000,  net of deferred  income taxes.  The Company

                                      F-23


anticipates that all original  forecasted  transactions will occur by the end of
the originally specified time periods.

         The Company  adopted SFAS No. 133 adopted on January 1, 2001.  SFAS No.
133 requires  companies to report all derivatives at fair value as either assets
or  liabilities  and bases the  accounting  treatment of the  derivatives on the
reasons an entity holds the instrument. The adoption of SFAS No. 133 resulted in
the  Company  recording  a liability  of  $45,699,000  for the fair value of the
derivative  instruments  at January 1, 2001.  The Company's  adoption entry also
resulted in deferral of the  recognition of this liability to accumulated  other
comprehensive loss of $28,587,000, net of deferred income taxes.

         See  also  Derivative  Financial  Instruments  in Note 1 -  Summary  of
Significant Accounting Policies.

                                      F-23


11. Disclosures About Oil and Gas Producing Activities

Costs Incurred in Oil and Gas Producing Activities:

         Costs  incurred in oil and gas property  acquisition,  exploration  and
development  activities,  whether  capitalized  or expensed,  are  summarized as
follows:

                                               For the Years Ended December 31,
                                               --------------------------------
                                                    2002     2001     2000
                                                    ----     ----     ----
                                                          (In thousands)

                  Development costs               $ 74,376 $ 98,617 $ 48,996
                  Exploration                       22,778   24,506   17,012
                  Acquisitions:
                    Proved                          87,706   41,188   53,482
                    Unproved                         8,128   18,552    5,694
                                                  -------- -------- --------
                  Total                           $192,988 $182,863 $125,184
                                                  ======== ======== ========

Oil and Gas Reserve Quantities (Unaudited):

         The reserve  information  as of December 31, 2002,  2001,  and 2000 was
prepared  by Ryder Scott  Company and St.  Mary.  The  Company  emphasizes  that
reserve estimates are inherently imprecise and that estimates of new discoveries
are more  imprecise  than  those of  proved  producing  oil and gas  properties.
Accordingly,  these  estimates  are  expected  to change  as future  information
becomes available.

         Proved oil and gas reserves are the estimated  quantities of crude oil,
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  oil and gas  reserves  are those  expected  to be  recovered  through
existing wells with existing equipment and operating methods.


                                      F-24



         Presented below is a summary of the changes in estimated domestic
reserves of the Company:
                                                             For the Years Ended December 31,
                                                             --------------------------------
                                                        2002                  2001                 2000
                                                      --------                ----                 ----
                                                 Oil or                Oil or                Oil or
                                               Condensate    Gas     Condensate    Gas     Condensate    Gas
                                               ----------    ---     ----------    ---     ----------    ---
                                                 (MBbl)     (MMcf)     (MBbl)     (MMcf)     (MBbl)    (MMcf)
Total proved reserves:
         Developed and undeveloped:
         Beginning of year                       23,669    241,231     20,950    225,975     18,900    207,642
         Revisions of previous estimate           3,611      4,696     (1,334)   (16,421)       210     (1,172)
         Discoveries and extensions               1,250     32,813      3,131     59,830      1,707     37,702
         Purchases of minerals in place          10,578     38,118      3,774     13,086      3,149     21,689
         Sales of reserves                         (174)    (4,522)      (418)    (1,748)      (618)    (1,540)
         Production                              (2,815)   (38,164)    (2,434)   (39,491)    (2,398)   (38,346)
                                                 ------    -------     ------    -------     ------    -------
         End of year (a)                         36,119    274,172     23,669    241,231     20,950    225,975
                                                 ======    =======     ======    =======     ======    =======

Proved developed reserves:
         Beginning of year                       20,679    205,637     19,006    192,472     16,688    169,379
                                                 ======    =======     ======    =======     ======    =======
         End of year                             33,580    228,973     20,679    205,637     19,006    192,472
                                                 ======    =======     ======    =======     ======    =======
         ------------------
         (a)      At December 31, 2002, 2001, and 2000,  includes  approximately
                  1,151,  869 and 1,199  MMcf,  respectively,  representing  the
                  Company's underproduced gas balancing position.

Standardized Measure of Discounted Future Net Cash Flows (Unaudited):

         SFAS No.  69,  "Disclosures  About Oil and Gas  Producing  Activities,"
prescribes  guidelines for computing a  standardized  measure of future net cash
flows and changes therein relating to estimated proved reserves. The Company has
followed these guidelines, which are briefly discussed below.

         Future cash inflows and future  production  and  development  costs are
determined by applying  benchmark  prices and costs,  including  transportation,
quality and basis differential,  in effect at year-end to the year-end estimated
quantities of oil and gas to be produced in the future.  Estimated future income
taxes  are  computed  using  current  statutory  income  tax  rates,   including
consideration for estimated future statutory depletion and alternative fuels tax
credits.  The  resulting  future  net cash flows are  reduced  to present  value
amounts by applying a 10% annual discount factor.

         The  assumptions  used to compute  the  standardized  measure are those
prescribed  by the  FASB  and the  Securities  and  Exchange  Commission.  These
assumptions  do not  necessarily  reflect the Company's  expectations  of actual
revenues  to be derived  from  those  reserves,  nor their  present  worth.  The
limitations  inherent in the reserve quantity  estimation  process, as discussed
previously,  are equally  applicable to the  standardized  measure  computations
since these  estimates  are the basis for the valuation  process.  The following
prices, adjusted for transportation,  quality and basis differentials, were used
in the calculation of the standardized measure:

                                              For the Years Ended December 31,
                                              --------------------------------
                                               2002          2001         2000
                                               ----          ----         ----

                  Gas (per Mcf)               $ 4.211      $ 2.502     $  8.857
                  Oil (per Bbl)               $29.311      $18.113     $ 25.439

                                      F-25


         The following  summary sets forth the  Company's  future net cash flows
relating  to  proved  oil and gas  reserves  based on the  standardized  measure
prescribed in SFAS No. 69:

                                                     For the Years Ended December 31,
                                                     --------------------------------
                                                  2002           2001             2000
                                                  ----           ----             ----
                                                            (In thousands)

         Future cash inflows                   $2,238,513      $1,020,948       $2,648,108
              Future production and
                development costs                (783,991)       (444,608)        (570,711)
              Future income taxes                (429,618)       (140,271)        (727,929)
                                               ----------     -----------       ----------
         Future net cash flows                  1,024,904         436,069        1,349,468
         10% annual discount                     (443,042)       (154,192)        (630,984)
                                               ----------     -----------       ----------

         Standardized measure of
              discounted future net cash flows $  581,862      $  281,877       $  718,484
                                               ==========     ===========       ==========

                  The principle sources of change in the standardized measure of
         discounted future net cash flows are as follows:

                                                     For the Years Ended December 31,
                                                     --------------------------------
                                                  2002            2001             2000
                                                  ----            ----             ----
                                                           (In thousands)
   Standard measure, beginning of year         $  281,877      $  718,484       $  261,314
   Sales of oil and gas produced,
              net of production costs            (137,066)       (170,074)        (183,586)
   Net changes in prices and production costs     298,079        (820,253)         772,910
   Extensions, discoveries and other,
              net of production costs              92,227          71,265          203,786
Purchase of minerals in place                     160,089          29,267          104,883
   Development costs incurred during the year      23,802          35,736           12,436
   Changes in estimated future development cost     4,265          (8,370)             351
   Revisions of previous quantity estimates        49,892         (17,593)             306
   Accretion of discount                           34,749         109,912           33,871
   Sales of reserves in place                        (708)        (10,548)          (3,329)
   Net change in income taxes                    (177,335)        298,717         (357,780)
Other                                             (48,009)         45,334         (126,678)
                                               ----------     -----------       ----------
   Standardized measure, end of year           $  581,862      $  281,877       $  718,484
                                               ==========     ===========       ==========

                                      F-26



12.   Quarterly Financial Information (Unaudited)

         The Company's quarterly financial information for fiscal 2002 and 2001
is as follows (in thousands, except per share amounts):

                                                  First      Second     Third      Fourth
                                                 Quarter     Quarter    Quarter    Quarter
                                                ---------- ---------- ---------- ----------
Year Ended December 31, 2002:
Total Revenue                                    $  42,773  $  50,028  $  48,335  $  55,258
     Less: costs and expenses                       38,991     33,322     35,634     42,758
                                                ---------- ---------- ---------- ----------
Operating Income                                 $   3,782  $  16,706  $  12,701  $  12,500

Income before income taxes                       $   3,440  $  15,858  $   1,187  $  11,402
Net income                                       $   2,318  $  10,589  $   7,674  $   6,979
Net income per common share:
     Basic                                       $    0.08  $    0.38  $    0.28  $    0.25
     Diluted                                     $    0.08  $    0.37  $    0.27  $    0.24

Dividends paid per share                         $       -  $    0.05  $       -  $    0.05

Year Ended December 31, 2001
Total Revenue                                    $  68,347  $  55,776  $  42,656  $  40,690
     Less: costs and expenses                       36,626     32,804     37,129     38,998
                                                ---------- ---------- ---------- ----------
Operating Income                                    31,721     22,972      5,527      1,692

Income before income taxes                       $  31,874  $  23,119  $   5,595  $   1,700
Net income                                       $  20,393  $  14,234  $   4,861  $     971
Net income per common share:
     Basic                                       $    0.72  $    0.51  $    0.17  $    0.04
     Diluted                                     $    0.71  $    0.50  $    0.17  $    0.03

Dividends paid per share                         $       -  $    0.05  $       -  $    0.05

13. Subsequent Events (Unaudited)

Long - Term Debt

         In January  2003 the Company  entered  into a new  long-term  revolving
credit agreement that replaced the agreement dated June 30, 1998. The new credit
agreement specifies a maximum loan amount of $300,000,000.  Borrowings under the
facility  are secured by a pledge of  collateral  in favor of the lenders and by
common stock of material  subsidiaries  of the Company.  The  borrowing  base is
currently  $215,000,000  but will be increased to  $250,000,000  when additional
collateral is provided to the lenders. The lenders may periodically re-determine
the aggregate  borrowing base depending upon the value of St. Mary's oil and gas
properties  and other  assets.  The aggregate  commitment  was  $150,000,000  at
January 27, 2003,  and the credit  agreement  has a maturity date of January 27,
2006. The Company must comply with certain covenants.  Interest is accrued based
on the borrowing base utilization percentage as LIBOR or the Alternate Base Rate
("ABR"), which is the Prime rate plus the following:

                                      F-27


Borrowing base
utilization percentage          <30%  =>30%<40%  =>40%<50%     =>50%
- -----------------------------------------------------------------------------------------------
Eurodollar Loans                 1.250%          1.500%           1.750%          2.000%
ABR Loans                        0.000%          0.250%           0.500%          0.750%
Commitment Fee Rate              0.300%          0.375%           0.375%          0.500%

Acquisitions

         On January  29,  2003,  the  Company  closed the  previously  announced
agreement to acquire oil and gas properties from Flying J Oil & Gas Inc. and
Big West Oil & Gas Inc. St. Mary issued  3,380,818  shares of its restricted
common stock valued at $71,594,000 for an estimated 66.9 BCFE of proved reserves
and a net  amount of  $2,800,000  in cash for  purchase  price  adjustments.  In
addition,  St.  Mary has made a  non-recourse  loan to  Flying J and Big West of
$71,594,000  at LIBOR plus 2% for up to a 39-month  period  that is secured by a
pledge of these shares of St. Mary stock. During the 39-month loan period Flying
J and Big West can elect to sell their  shares of St.  Mary stock to the Company
for $71,594,000  plus accrued  interest on the loan for the first thirty months,
and St. Mary can elect to purchase the shares for $97,447,000, with the proceeds
applied to the repayment of the loan.

                                      F-28



                                   SIGNATURES


         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                        ST. MARY LAND & EXPLORATION COMPANY
                                        ---------------------------------------
                                                    (Registrant)



Date:  March 12, 2003                   By: /s/ MARK A. HELLERSTEIN
                                           -----------------------------------
                                           Mark A. Hellerstein
                                           Chairman of the Board of Directors,
                                           President and Chief Executive Officer


                            GENERAL POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below  constitutes and appoints Mark A.  Hellerstein his or her true and
lawful   attorney-in-fact   and  agent  with  full  power  of  substitution  and
resubstitution,  for him or her and in his or her name,  place and stead, in any
and all  capacities,  to sign any amendments to this annual report on Form 10-K,
and to file the same,  with exhibits  thereto and other  documents in connection
therewith,  with the Securities and Exchange  Commission,  hereby  ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.

         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
registrant and in the capacities and on the dates indicated.


Signature                  Title                                  Date
- ---------                  -----                                  ----

/s/ MARK A. HELLERSTEIN    Chairman of the Board of Directors,    March 12, 2003
- -----------------------    President and Chief Executive Officer
Mark A. Hellerstein


/s/ RONALD D. BOONE        Executive Vice President, Chief        March 12, 2003
- -----------------------    Operating Officer and Director
Ronald D. Boone


/s/ ROBERT L. NANCE        Senior Vice President and Director     March 12, 2003
- -----------------------
Robert L. Nance


/s/ RICHARD C. NORRIS      Vice President-Finance,                March 12, 2003
- -----------------------    Secretary and Treasurer
Richard C. Norris


/s/ GARRY A. WILKENING     Vice President-Administration          March 12, 2003
- -----------------------    and Controller
Garry A. Wilkening



Signature                  Title                                  Date
- ---------                  -----                                  ----

/s/BARBARA M. BAUMANN      Director                               March 12, 2003
- -----------------------
Barbara M. Baumann


                           Director                               March 12, 2003
- -----------------------
Larry W. Bickle


                           Director                               March 12, 2003
- -----------------------
Thomas E. Congdon


/s/ WILLIAM J. GARDINER    Director                               March 12, 2003
- -----------------------
William J. Gardiner


/s/ AREND J. SANDBULTE     Director                               March 12, 2003
- -----------------------
Arend J. Sandbulte


                            Director                               March 12,2003
- -----------------------
John M. Seidl





                                  CERTIFICATION

         I, Mark A. Hellerstein, certify that:

         1. I have reviewed this annual report on Form 10-K of St. Mary Land
& Exploration Company;

         2. Based on my knowledge, this annual 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
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

         Date:  March 12, 2003

                                            /s/ MARK A. HELLERSTEIN
                                            ------------------------------------
                                            Mark A. Hellerstein
                                            Chairman of the Board, President and
                                            Chief Executive Officer




                                  CERTIFICATION

         I, Richard C. Norris, certify that:

         1. I have reviewed this annual report on Form 10-K of St. Mary Land
& Exploration Company;

         2. Based on my knowledge, this annual 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
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

         a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

         a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

         6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

         Date:  March 12, 2003

                                            /s/ RICHARD C. NORRIS
                                            ------------------------------------
                                            Richard C. Norris
                                            Vice-President - Finance

EX-10

                                                                   EXHIBIT 10.44

                                CREDIT AGREEMENT

                                   DATED AS OF

                                JANUARY 27, 2003

                                      AMONG

                    ST. MARY LAND & EXPLORATION COMPANY,
                                  AS BORROWER,

                      WACHOVIA BANK, NATIONAL ASSOCIATION,
                            AS ADMINISTRATIVE AGENT,


                    BANK ONE, NA AND WELLS FARGO BANK, N.A.,
                            AS CO-SYNDICATION AGENTS,


                  ROYAL BANK OF CANADA AND COMERICA BANK-TEXAS,
                           AS CO-DOCUMENTATION AGENTS,


                                       AND

                            THE LENDERS PARTY HERETO


                           $300,000,000 SENIOR SECURED
                            REVOLVING CREDIT FACILITY



                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

ARTICLE I Definitions and Accounting Matters...................................1
Section 1.01    Terms Defined Above............................................1
Section 1.02    Certain Defined Terms..........................................1
Section 1.03    Types of Loans and Borrowings.................................20
Section 1.04    Terms Generally...............................................20
Section 1.05    Accounting Terms and Determinations; GAAP.....................20

ARTICLE II The Credits........................................................21
Section 2.01    Commitments...................................................21
Section 2.02    Loans and Borrowings..........................................21
Section 2.03    Requests for Borrowings.......................................22
Section 2.04    Interest Elections............................................23
Section 2.05    Funding of Borrowings.........................................24
Section 2.06    Termination, Reduction and Increase of Aggregate Commitment...25
Section 2.07    Borrowing Base................................................27
Section 2.08    Letters of Credit.............................................29

ARTICLE III Payments of Principal and Interest; Prepayments; Fees.............33
Section 3.01    Repayment of Loans............................................34
Section 3.02    Interest......................................................34
Section 3.03    Alternate Rate of Interest....................................34
Section 3.04    Prepayments...................................................35
Section 3.05    Fees..........................................................37

ARTICLE IV Payments; Pro Rata Treatment; Sharing of Set-offs..................38
Section 4.01    Payments Generally; Pro Rata Treatment; Sharing of Set-offs...38
Section 4.02    Presumption of Payment by the Borrower........................39
Section 4.03    Certain Deductions by the Administrative Agent................39
Section 4.04    Disposition of Proceeds.......................................39

ARTICLE V Increased Costs; Break Funding Payments; Taxes; Illegality..........40
Section 5.01    Increased Costs...............................................40
Section 5.02    Break Funding Payments........................................40
Section 5.03    Taxes.........................................................41
Section 5.04    Designation of Different Lending Office.......................42
Section 5.05    Illegality....................................................42

ARTICLE VI Conditions Precedent...............................................43
Section 6.01    Effective Date................................................43

                                       i

Section 6.02    Each Credit Event.............................................45
Section 6.03    Further Conditions on Borrowing Base Increases................44

ARTICLE VII Representations and Warranties....................................46
Section 7.01    Organization; Powers..........................................46
Section 7.02    Authority; Enforceability.....................................46
Section 7.03    Approvals; No Conflicts.......................................47
Section 7.04    Financial Condition; No Material Adverse Change...............47
Section 7.05    Litigation....................................................48
Section 7.06    Environmental Matters.........................................48
Section 7.07    Compliance with the Laws and Agreements; No Defaults..........49
Section 7.08    Investment Company Act........................................49
Section 7.09    Public Utility Holding Company Act............................49
Section 7.10    Taxes.........................................................49
Section 7.11    ERISA.........................................................50
Section 7.12    Disclosure; No Material Misstatements.........................51
Section 7.13    Insurance.....................................................51
Section 7.14    Restriction on Liens..........................................51
Section 7.15    Subsidiaries..................................................51
Section 7.16    Location of Business and Offices..............................52
Section 7.17    Properties; Titles, Etc.......................................52
Section 7.18    Maintenance of Properties.....................................53
Section 7.19    Gas Imbalances, Prepayments...................................53
Section 7.20    Marketing of Production.......................................54
Section 7.21    Swap Agreements...............................................54
Section 7.22    Use of Loans and Letters of Credit............................54
Section 7.23    Solvency......................................................54
Section 7.24    Material Agreements...........................................55

ARTICLE VIII Affirmative Covenants............................................55
Section 8.01    Financial Statements; Ratings Change; Other Information.......55
Section 8.02    Notices of Material Events....................................57
Section 8.03    Existence; Conduct of Business................................58
Section 8.04    Payment of Obligations........................................58
Section 8.05    Performance of Obligations under Loan Documents...............58
Section 8.06    Operation and Maintenance of Properties.......................58
Section 8.07    Insurance.....................................................59
Section 8.08    Books and Records; Inspection Rights..........................59
Section 8.09    Compliance with Laws..........................................59
Section 8.10    Environmental Matters.........................................59
Section 8.11    Further Assurances............................................60
Section 8.12    Reserve Reports...............................................61
Section 8.13    Title Information.............................................62
Section 8.14    Additional Collateral; Additional Guarantors..................63
Section 8.15    ERISA Compliance..............................................63
Section 8.16    Performance of Material Agreements............................64

                                       ii

ARTICLE IX Negative Covenants.................................................64
Section 9.01    Financial Covenants...........................................64
Section 9.02    Debt..........................................................64
Section 9.03    Liens.........................................................65
Section 9.04    Dividends, Distributions and Redemptions......................65
Section 9.05    Investments, Loans and Advances...............................66
Section 9.06    Designation of Material Subsidiaries..........................67
Section 9.07    Nature of Business; International Operations..................67
Section 9.08    Limitation on Leases..........................................67
Section 9.09    Proceeds of Notes.............................................68
Section 9.10    ERISA Compliance..............................................68
Section 9.11    Sale or Discount of Receivables...............................69
Section 9.12    Mergers, Etc..................................................69
Section 9.13    Sale of Properties............................................70
Section 9.14    Environmental Matters.........................................70
Section 9.15    Transactions with Affiliates..................................70
Section 9.16    Subsidiaries..................................................70
Section 9.17    Negative Pledge Agreements; Dividend Restrictions.............71
Section 9.18    Gas Imbalances, Take-or-Pay or Other Prepayments..............71
Section 9.19    Swap Agreements...............................................71
Section 9.20    Preservation of Material Agreements...........................71
Section 9.21    Release of Liens..............................................72

ARTICLE X Events of Default; Remedies.........................................72
Section 10.01   Events of Default.............................................72
Section 10.02   Remedies......................................................74

ARTICLE XI The Administrative Agent...........................................75
Section 11.01   Appointment; Powers...........................................75
Section 11.02   Duties and Obligations of Administrative Agent................75
Section 11.03   Action by Administrative Agent................................75
Section 11.04   Reliance by Administrative Agent..............................76
Section 11.05   Subagents.....................................................76
Section 11.06   Resignation or Removal of Administrative Agent................77
Section 11.07   Administrative Agent as  Lenders..............................77
Section 11.08   No Reliance...................................................77
Section 11.09   Authority of Administrative Agent to Release Collateral
                 and Liens....................................................78

ARTICLE XII Miscellaneous.....................................................78
Section 12.01   Notices.......................................................78
Section 12.02   Waivers; Amendments...........................................79
Section 12.03   Expenses, Indemnity; Damage Waiver............................80
Section 12.04   Successors and Assigns........................................82
Section 12.05   Survival; Revival; Reinstatement..............................85
Section 12.06   Counterparts; Integration; Effectiveness......................86
Section 12.07   Severability..................................................86

                                      iii

Section 12.08   Right of Setoff...............................................86
Section 12.09   GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS....87
Section 12.10   Headings......................................................88
Section 12.11   Confidentiality...............................................88
Section 12.12   Interest Rate Limitation......................................89
Section 12.13   EXCULPATION PROVISIONS........................................90
Section 12.14   Existing Credit Agreement.....................................90


         Annex I           List of Maximum Credit Amounts
`
         Exhibit A         Form of Note
         Exhibit B         Form of Compliance Certificate
         Exhibit C         Form of Legal Opinion of Ballard Spahr Andrews &
                           Ingersoll,  LLP,  special  counsel to the Borrower
                           and the Guarantors
         Exhibit D-1       Security Instruments
         Exhibit D-2       Form of Guaranty Agreement
         Exhibit E         Form of Assignment and Assumption
         Exhibit F-1       Form of Maximum Credit Amount Increase Certificate
         Exhibit F-2       Form of Additional Lender Certificate


         Schedule 7.05     Litigation
         Schedule 7.15     Subsidiaries and Partnerships; Non-Material
                           Subsidiaries
         Schedule 7.19     Gas Imbalances
         Schedule 7.20     Marketing Contracts
         Schedule 7.21     Swap Agreements
         Schedule 7.24     Material Agreements
         Schedule 9.05(a)  Investments
         Schedule 9.05(h)  Existing Investments (Non-Oil and Gas)

                                       iv


         THIS CREDIT AGREEMENT dated as of January 27, 2003, is by and among ST.
MARY LAND &  EXPLORATION  COMPANY,  a  corporation  duly formed and existing
under the laws of the State of Delaware  (the  "Borrower");  each of the Lenders
                                                --------
from time to time party hereto;  WACHOVIA  BANK,  NATIONAL  ASSOCIATION  (in its
individual  capacity,  "Wachovia"),  as administrative agent for the Lenders (in
                        --------
such   capacity,   together   with  its   successors  in  such   capacity,   the
"Administrative   Agent")  BANK  ONE,  NA  and  WELLS  FARGO  BANK,   N.A.,   as
 ----------------------
Co-Syndication  Agents;  and ROYAL BANK OF CANADA and COAMERICA  BANK-TEXAS,  as
Co-Documentation Agents.

                                 R E C I T A L S
                                 ---------------

         A.   The Borrower has requested that the Lenders provide certain  loans
to and extensions of credit on behalf of the Borrower.

         B.   The  Lenders  have  agreed to  make such  loans and  extensions of
credit subject to the terms and conditions of this Agreement.

         C.   In consideration  of the mutual  covenants and  agreements  herein
contained  and of the  loans, extensions  of credit and  commitments hereinafter
referred to, the parties hereto agree as follows:

                                   ARTICLE 1
                       Definitions and Accounting Matters


         Section 1.01 Terms Defined Above. As used in this Agreement,  each term
                      -------------------
defined above has the meaning indicated above.

         Section 1.02 Certain  Defined  Terms.  As used in this  Agreement,  the
                      -----------------------
following terms have the meanings specified below:

         "ABR",  when  used in  reference  to any Loan or  Borrowing,  refers to
          ---
whether such Loan, or the Loans comprising such Borrowing,  are bearing interest
at a rate determined by reference to the Alternate Base Rate.

         "Acquisition"  means the  acquisition by the Borrower of certain assets
          -----------
of Flying J Oil &  Gas,  Inc.  ("Flying J") and Big West Oil &  Gas Inc.
                                     --------
("Big  West")  pursuant to the terms and  conditions  contained  in that certain
  ---------
Purchase and Sale  Agreement  dated as of December 13, 2002, by and among Flying
J, Big West and the Borrower (the "Purchase and Sale Agreement").
                                   ---------------------------

         "Acquisition Date" means the date the Acquisition is consummated, which
          ----------------
shall occur no later than February 15, 2003.

         "Additional  Lender" has the  meaning  assigned to such term in Section
          ------------------
2.06(c)(i).

         "Additional  Lender  Certificate" has the meaning assigned to such term
          -------------------------------
in Section 2.06(c)(ii)(F).

         "Adjusted LIBO Rate" means,  with respect to any  Eurodollar  Borrowing
          ------------------
for any  Interest  Period,  an  interest  rate per annum  (rounded  upwards,  if
necessary,  to the next 1/16 of 1%) equal to (a) the LIBO Rate for such  Interest
Period multiplied by (b) the Statutory Reserve Rate.

         "Administrative Questionnaire" means an Administrative Questionnaire in
          ----------------------------
a form supplied by the Administrative Agent.

         "Affected Loans" has the meaning assigned such term in Section 5.05.
          --------------

         "Affiliate"  means, with respect to a specified Person,  another Person
          ---------
that directly, or indirectly through one or more intermediaries,  Controls or is
Controlled by or is under common Control with the Person specified.

         "Aggregate  Commitment"  at any time means the aggregate  amount of the
          ---------------------
Commitments  of all the  Lenders,  as  reduced  or  increased  from time to time
pursuant to the terms hereof;  provided that the Aggregate  Commitment shall not
                               -------- ----
at any time exceed the then  effective  Borrowing  Base.  The initial  Aggregate
Commitment is $150,000,000.

         "Aggregate  Revolving Credit Exposures" at any time means the aggregate
          -------------------------------------
amount of the Revolving Credit Exposures of all of the Lenders.

         "Agreement" means this Credit  Agreement,  as the same may from time to
          ---------
time be amended, modified, supplemented or restated.

         "Alternate Base Rate" means, for any day, a rate per annum equal to the
          -------------------
greater  of (a) the Prime  Rate in effect on such day or (b) the  Federal  Funds
Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate
Base Rate due to a change in the Prime Rate or the Federal Funds  Effective Rate
shall be effective  from and including the effective  date of such change in the
Prime Rate or the Federal Funds Effective Rate, respectively.

         "Applicable Margin" means, for any day, with respect to any ABR Loan or
          -----------------
Eurodollar  Loan, or with respect to any commitment fees payable  hereunder,  as
the case may be, the rate per annum set forth in the Borrowing Base  Utilization
Grid below based upon the Borrowing Base Utilization Percentage then in effect:

- ----------------------------------------------------------------------------
                         Borrowing Base Utilization Grid
- ----------------------------------------------------------------------------
Borrowing Base
Utilization Percentage   <50%  =>50%<75% =>75%<90%  =>90%
- ------------------------ ------------ ------------ ------------ ------------
Eurodollar Loans            1.250%         1.500%      1.750%      2.000%
- ------------------------ ------------ ------------ ------------ ------------
ABR Loans                   0.000%         0.250%      0.500%      0.750%
- ------------------------ ------------ ------------ ------------ ------------
Commitment Fee Rate         0.300%         0.375%      0.375%      0.500%
- ------------------------ ------------ ------------ ------------ ------------

         Each change in the  Applicable  Margin  shall  apply  during the period
commencing  on the  effective  date  of  such  change  and  ending  on the  date
immediately  preceding  the  effective  date of the next such change,  provided,
however,  that if at any time the  Borrower  fails to  deliver a Reserve  Report
pursuant  to Section  8.12(a),  then until  such time as the  Reserve  Report is

                                       2

delivered the "Applicable Margin" means the rate per annum set forth on the grid
               -----------------
when the Borrowing Base Utilization Percentage is at its highest level.

         "Applicable   Percentage"  means,  with  respect  to  any  Lender,  the
          -----------------------
percentage of the Aggregate Commitments  represented by such Lender's Commitment
as such percentage is set forth on Annex I.

         "Approved  Counterparty"  means (a) any  Lender or any  Affiliate  of a
          ----------------------
Lender and (b) any other Person whose long term senior  unsecured debt rating is
BBB+/Baa1 by S&P or Moody's (or their equivalent) or higher.

         "Approved Fund" means (a) a CLO and (b) with respect to any Lender that
          -------------
is a fund which  invests in bank loans and  similar  extensions  of credit,  any
other fund that  invests in bank loans and similar  extensions  of credit and is
managed by the same investment advisor as such Lender or by an Affiliate of such
investment advisor.

         "Approved  Petroleum  Engineers"  means (a)  Netherland,  Sewell  &
          ------------------------------
Associates,  Inc., (b) Ryder Scott Company Petroleum  Consultants,  L.P. and (c)
any  other  independent   petroleum  engineers  reasonably   acceptable  to  the
Administrative Agent.

         "Assignments"  means (a) the  Assignment of Notes and Liens dated as of
          -----------
even date  herewith  from each Former  Lender to the Former  Agent,  and (b) the
Assignment  of  Undivided  Interest  in Notes  and  Liens  dated as of even date
herewith  from  the  Former  Agent  to the  Administrative  Agent,  whereby  the
indebtedness  of the Borrower to the Former  Lenders  under the Existing  Credit
Agreement,  together  with all Liens  securing  the  payment  thereof,  has been
assigned to the Lenders and, to the extent set forth therein, the Administrative
Agent.

         "Assignment and Assumption" means an assignment and assumption  entered
          -------------------------
into by a Lender and an assignee (with the consent of any party whose consent is
required by Section 12.04(b)),  and accepted by the Administrative Agent, in the
form of Exhibit E or any other form approved by the Administrative Agent.

         "Availability Period" means the period from and including the Effective
          -------------------
Date to but excluding the Termination Date.

         "Board" means the Board of Governors of the Federal  Reserve  System of
          -----
the United States of America or any successor Governmental Authority.

         "Borrowing" means Loans of the same Type, made,  converted or continued
          ---------
on the same  date and,  in the case of  Eurodollar  Loans,  as to which a single
Interest Period is in effect.

         "Borrowing  Base"  means at any  time an  amount  equal  to the  amount
          ---------------
determined  in  accordance  with Section  2.07, as the same may be adjusted from
time to time  pursuant  to Section  8.13(c),  Section  9.12 or Section  9.13(e);
provided  that the Borrowing  Base shall not any time exceed the Maximum  Credit
- --------  ----
Amount.

                                       3

         "Borrowing  Base  Utilization  Percentage"  means,  as of any day,  the
          ----------------------------------------
fraction  expressed as a  percentage,  the  numerator of which is the  Aggregate
Revolving  Credit  Exposures of the Lenders on such day, and the  denominator of
which is the Borrowing Base in effect on such day.

         "Borrowing  Request" means a request by the Borrower for a Borrowing in
          ------------------
accordance with Section 2.03.

         "Business  Day" means any day that is not a  Saturday,  Sunday or other
          -------------
day on which commercial banks in Charlotte, North Carolina or Houston, Texas are
authorized  or  required by law to remain  closed;  and if such day relates to a
Borrowing  or  continuation  of, a payment  or  prepayment  of  principal  of or
interest  on,  or a  conversion  of or  into,  or the  Interest  Period  for,  a
Eurodollar  Loan or a notice by the Borrower with respect to any such  Borrowing
or continuation,  payment,  prepayment,  conversion or Interest Period,  any day
which is also a day on which dealings in dollar  deposits are carried out in the
London interbank market.

         "Capital  Leases"  means,  in respect of any Person,  all leases  which
          ---------------
shall have been,  or should  have been,  in  accordance  with GAAP,  recorded as
capital leases on the balance sheet of the Person liable (whether  contingent or
otherwise) for the payment of rent thereunder.

         "Casualty Event" means any uninsured loss, uninsured casualty or other
          --------------
uninsured damage to, or any nationalization, taking under power of eminent
domain or by condemnation or similar proceeding of, any Property of the Borrower
or any of its Material Subsidiaries having a fair market value in excess of
$1,000,000.

         "Change in Control" means (a) the acquisition of ownership, directly or
          -----------------
indirectly,  beneficially  or of  record,  by any  Person or group  (within  the
meaning  of the  Securities  Exchange  Act of  1934  and  the  rules  of the SEC
thereunder as in effect on the date hereof),  of Equity  Interests  representing
more than 30% of the aggregate  ordinary voting power  represented by the issued
and outstanding  Equity Interests of the Borrower,  (b) occupation of a majority
of the seats (other than vacant seats) on the board of directors of the Borrower
by Persons  who were  neither (i)  nominated  by the board of  directors  of the
Borrower nor (ii) appointed by directors so nominated or (c) the  acquisition of
direct or indirect Control of the Borrower by any Person or group.

         "Change in Law" means (a) the adoption of any law,  rule or  regulation
          -------------
after the date of this Agreement,  (b) any change in any law, rule or regulation
or in the  interpretation or application  thereof by any Governmental  Authority
after the date of this  Agreement or (c) compliance by any Lender or the Issuing
Bank (or, for purposes of Section 5.01(b)), by any lending office of such Lender
or by such  Lender's or the Issuing  Bank's  holding  company,  if any) with any
request,  guideline or directive (whether or not having the force of law) of any
Governmental Authority made or issued after the date of this Agreement.

         "CLO" means any entity  (whether a corporation,  partnership,  trust or
          ---
otherwise) that is engaged in making, purchasing, holding or otherwise investing
in bank loans and similar  extensions  of credit in the  ordinary  course of its
business  and is  administered  or managed by a Lender or an  Affiliate  of such
Lender.

                                       4

         "Code" means the Internal Revenue Code of 1986, as amended from time to
          ----
time, and any successor statute.

         "Commitment" means, with respect to each Lender, the commitment of such
          ----------
Lender  to make  Loans  and to  acquire  participations  in  Letters  of  Credit
hereunder,  expressed as an amount  representing the maximum aggregate amount of
such Lender's Revolving Credit Exposure hereunder, as such commitment may be (a)
modified  from time to time  pursuant to Section 2.06 and (b) modified from time
to time  pursuant  to  assignments  by or to such  Lender  pursuant  to  Section
12.04(b).  The amount representing each Lender's Commitment shall at any time be
the lesser of such Lender's Applicable  Percentage of the Aggregate  Commitment.
The  amount of each  Lender's  initial  Commitment  is set forth  opposite  such
Lender's name on Annex I under the caption "Commitment."

         "Commitment  Fee Rate" has the meaning set forth in the  definition  of
          --------------------
"Applicable Margin".
 -----------------

         "Commitment Increase Certificate" has the meaning assigned to such term
          -------------------------------
in Section 2.06(c)(ii)(E).

         "Consolidated  Net Income"  means with  respect to the Borrower and the
          ------------------------
Consolidated  Subsidiaries,  for any period, the aggregate of the net income (or
loss) of the Borrower and the  Consolidated  Subsidiaries  after  allowances for
taxes for such period  determined on a  consolidated  basis in  accordance  with
GAAP;  provided that there shall be excluded from such net income (to the extent
otherwise  included therein) the following:  (a) the net income of any Person in
which  the  Borrower  or any  Consolidated  Subsidiary  has an  interest  (which
interest  does not cause the net income of such other Person to be  consolidated
with  the net  income  of the  Borrower  and the  Consolidated  Subsidiaries  in
accordance  with  GAAP),  except to the  extent of the  amount of  dividends  or
distributions  actually  paid in cash during such period by such other Person to
the Borrower or to a  Consolidated  Subsidiary,  as the case may be; (b) the net
income (but not loss) during such period of any  Consolidated  Subsidiary to the
extent that the declaration or payment of dividends or similar  distributions or
transfers or loans by that Consolidated  Subsidiary is not at the time permitted
by  operation  of the  terms of its  charter  or any  agreement,  instrument  or
Governmental  Requirement  applicable  to  such  Consolidated  Subsidiary  or is
otherwise  restricted or prohibited,  in each case determined in accordance with
GAAP;   (c)  the  net   income   (or  loss)  of  any   Person   acquired   in  a
pooling-of-interests  transaction  for  any  period  prior  to the  date of such
transaction;  (d) any  non-cash  gains or losses  during such period and (e) any
gains or losses  attributable  to writeups or  writedowns  of assets,  including
ceiling test writedowns.

         "Consolidated  Subsidiaries"  means  each  Subsidiary  of the  Borrower
          --------------------------
(whether now existing or hereafter created or acquired) the financial statements
of  which  shall be (or  should  have  been)  consolidated  with  the  financial
statements of the Borrower in accordance with GAAP.

         "Control" means the possession, directly or indirectly, of the power to
          -------
direct or cause the direction of the management or policies of a Person, whether
through  the  ability to  exercise  voting  power,  by  contract  or  otherwise.

                                       6

"Controlling" and "Controlled" have meanings correlative thereto.
 -----------       ----------

         "Debt"  means,  for  any  Person,  the  sum of the  following  (without
          ----
duplication): (a) all obligations of such Person for borrowed money or evidenced
by bonds, bankers' acceptances,  debentures, notes or other similar instruments;
(b) all obligations of such Person (whether  contingent or otherwise) in respect
of letters of credit,  surety or other  bonds and similar  instruments;  (c) all
accounts  payable,  accrued  expenses,  liabilities or other obligations of such
Person to pay the  deferred  purchase  price of  Property or  services;  (d) all
obligations  under Capital Leases;  (e) all obligations  under Synthetic Leases;
(f) all Debt (as  defined  in the other  clauses of this  definition)  of others
secured by a Lien on any  Property of such  Person,  whether or not such Debt is
assumed by such  Person;  (g) all Debt (as defined in the other  clauses of this
definition)  of  others  guaranteed  by such  Person  or in  which  such  Person
otherwise  assures a creditor against loss of the Debt (howsoever such assurance
shall be made) to the  extent of the  lesser of the  amount of such Debt and the
maximum  stated  amount of such  guarantee or assurance  against  loss;  (h) all
obligations or undertakings of such Person to maintain or cause to be maintained
the  financial  position  or  covenants  of  others or to  purchase  the Debt or
Property of others; (i) obligations to deliver  commodities,  goods or services,
including,  without  limitation,  Hydrocarbons,  in consideration of one or more
advance payments,  other than gas balancing  arrangements in the ordinary course
of business;  (j)  obligations to pay for goods or services  whether or not such
goods or services are actually received or utilized by such Person; (k) any Debt
of a  partnership  for  which  such  Person is liable  either by  agreement,  by
operation of law or by a Governmental Requirement but only to the extent of such
liability;  (l) Disqualified  Capital Stock; and (m) the undischarged balance of
any production  payment created by such Person or for the creation of which such
Person  directly or indirectly  received  payment.  The Debt of any Person shall
include all  obligations of such Person of the character  described above to the
extent such Person  remains  legally liable in respect  thereof  notwithstanding
that any such  obligation  is not  included as a liability  of such Person under
GAAP;  provided,   however,  the  contingent  obligations  of  Borrower  or  any
       --------    -------
Subsidiary  of Borrower  pursuant to the Purchase and Sale  Agreement  shall not
constitute  "Debt" within this  definition.  It is hereby  understood and agreed
that in calculating the amount of Debt in respect of borrowed money,  the effect
of Financial Accounting Standards Board Statement No. 133 shall be disregarded.

         "Default"  means any event or condition  which  constitutes an Event of
          -------
Default or which  upon  notice,  lapse of time or both  would,  unless  cured or
waived, become an Event of Default.

         "Disqualified  Capital  Stock" means any Equity  Interest  that, by its
          ----------------------------
terms (or by the terms of any security into which it is convertible or for which
it  is  exchangeable)  or  upon  the  happening  of  any  event,  matures  or is
mandatorily  redeemable for any consideration  other than other Equity Interests
(which would not constitute  Disqualified Capital Stock),  pursuant to a sinking
fund  obligation or otherwise,  or is  convertible or  exchangeable  for Debt or
redeemable for any consideration  other than other Equity Interests (which would
not constitute  Disqualified Capital Stock) at the option of the holder thereof,
in whole or in part,  on or prior to the date that is one year after the earlier
of (a) the  Maturity  Date and (b) the  date on which  there  are no  Loans,  LC
Exposure or other obligations  hereunder  outstanding and all of the Commitments
are terminated.

                                       6

         "dollars"  or "$"  refers  to  lawful  money of the  United  States  of
          -------
America.

         "EBITDA" means, for any period,  the sum of Consolidated Net Income for
          ------
such period plus the following  expenses or charges to the extent  deducted from
Consolidated  Net  Income  in  such  period:  interest,   taxes,   depreciation,
depletion,  amortization  and other noncash  charges,  minus all noncash  income
added to Consolidated Net Income.

         "Effective  Date" means the date on which the  conditions  specified in
          ---------------
Section 6.01 are satisfied (or waived in accordance with Section 12.02).

         "Engineering  Reports"  has the meaning  assigned  such term in Section
          --------------------
2.07(c)(i).

         "Environmental  Laws"  means  any  and  all  Governmental  Requirements
          -------------------
pertaining in any way to health,  safety the environment or the  preservation or
reclamation  of natural  resources,  in effect in any and all  jurisdictions  in
which the Borrower or any  Subsidiary is conducting or at any time has conducted
business,  or where any Property of the Borrower or any  Subsidiary  is located,
including without limitation, the Oil Pollution Act of 1990 ("OPA"), as amended,
                                                              ---
the  Clean Air Act,  as  amended,  the  Comprehensive  Environmental,  Response,
Compensation,  and Liability  Act of 1980  ("CERCLA"),  as amended,  the Federal
                                             ------
Water Pollution Control Act, as amended,  the Occupational Safety and Health Act
of  1970,  as  amended,  the  Resource  Conservation  and  Recovery  Act of 1976
("RCRA"),  as  amended,  the Safe  Drinking  Water Act,  as  amended,  the Toxic
  ----
Substances Control Act, as amended, the Superfund Amendments and Reauthorization
Act of 1986, as amended, the Hazardous Materials Transportation Act, as amended,
and other environmental  conservation or protection  Governmental  Requirements.
The term "oil" shall have the meaning  specified  in OPA,  the terms  "hazardous
                                                                       ---------
substance" and "release" (or "threatened  release") have the meanings  specified
- ---------       -------       -------------------
in CERCLA,  the terms "solid  waste" and  "disposal"  (or  "disposed")  have the
                       ------------        --------         --------
meanings  specified  in RCRA and the term  "oil and gas  waste"  shall  have the
                                            ------------------
meaning  specified  in  Section  91.1011  of the Texas  Natural  Resources  Code
("Section  91.1011");  provided,  however,  that (a) in the  event  either  OPA,
  ----------------
CERCLA,  RCRA or Section  91.1011 is amended so as to broaden the meaning of any
term  defined  thereby,  such  broader  meaning  shall apply  subsequent  to the
effective  date of such amendment and (b) to the extent the laws of the state or
other  jurisdiction  in which any Property of the Borrower or any  Subsidiary is
located establish a meaning for "oil," "hazardous  substance," "release," "solid
                                 ---    --------------------    -------    -----
waste,"  "disposal" or "oil and gas waste" which is broader than that  specified
- -----     --------      -----------------
in either OPA,  CERCLA,  RCRA or Section  91.1011,  such broader  meaning  shall
apply.

         "Equity   Interests"   means  shares  of  capital  stock,   partnership
          ------------------
interests,   joint  venture  interest  or  interests  in  comparable   entities,
membership  interests in a limited liability company,  beneficial interests in a
trust or other equity ownership interests in a Person, and any warrants, options
or other  rights  entitling  the holder  thereof to purchase or acquire any such
Equity Interest.

         "ERISA" means the Employee  Retirement  Income Security Act of 1974, as
          -----
amended, and any successor statute.

                                       7

         "ERISA  Affiliate"  means  each  trade  or  business  (whether  or  not
          ----------------
incorporated)  which together with the Borrower or a Subsidiary  would be deemed
to be a "single  employer" within the meaning of section  4001(b)(1) of ERISA or
subsections (b), (c), (m) or (o) of section 414 of the Code.

         "ERISA Event" means (a) a "Reportable  Event" described in section 4043
          -----------
of ERISA  and the  regulations  issued  thereunder,  (b) the  withdrawal  of the
Borrower,  a Subsidiary or any ERISA Affiliate from a Plan during a plan year in
which it was a "substantial employer" as defined in section 4001(a)(2) of ERISA,
(c) the filing of a notice of intent to  terminate a Plan or the  treatment of a
Plan amendment as a termination under section 4041 of ERISA, (d) the institution
of  proceedings  to  terminate  a Plan by the  PBGC or (e) any  other  event  or
condition  which might  constitute  grounds  under section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Plan.

         "Eurodollar",  when used in reference to any Loan or Borrowing,  refers
          ----------
to whether  such Loan,  or the Loans  comprising  such  Borrowing,  are  bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.

         "Event of Default" has the meaning assigned such term in Section 10.01.
          ----------------

         "Excepted  Liens"  means:  (a) Liens for  Taxes,  assessments  or other
          ---------------
governmental  charges  or  levies  which are not  delinquent  or which are being
contested in good faith by appropriate  action and for which  adequate  reserves
have been  maintained in  accordance  with GAAP;  (b) Liens in  connection  with
workers' compensation,  unemployment insurance or other social security, old age
pension or public  liability  obligations  which are not delinquent or which are
being  contested  in good faith by  appropriate  action  and for which  adequate
reserves have been maintained in accordance with GAAP; (c) statutory  landlord's
liens, operators', vendors', carriers', warehousemen's, repairmen's, mechanics',
suppliers', workers', materialmen's, construction or other like Liens arising by
operation  of law  in  the  ordinary  course  of  business  or  incident  to the
exploration,  development,  operation and  maintenance of Oil and Gas Properties
each of which is in respect of obligations  that are not delinquent or which are
being  contested  in good faith by  appropriate  action  and for which  adequate
reserves have been  maintained in accordance  with GAAP; (d)  contractual  Liens
which arise in the ordinary course of business under operating agreements, joint
venture  agreements,  oil and gas  partnership  agreements,  oil and gas leases,
farm-out agreements,  division orders, contracts for the sale, transportation or
exchange of oil and  natural  gas,  unitization  and  pooling  declarations  and
agreements,  area of mutual interest agreements,  overriding royalty agreements,
marketing agreements, processing agreements, net profits agreements, development
agreements,   gas  balancing  or  deferred  production  agreements,   injection,
repressuring and recycling agreements,  salt water or other disposal agreements,
seismic or other geophysical  permits or agreements,  and other agreements which
are usual and customary in the oil and gas business and are for claims which are
not delinquent or which are being contested in good faith by appropriate  action
and for which adequate  reserves have been  maintained in accordance  with GAAP,
provided  that any such Lien  referred  to in this  clause  does not  materially
impair the use of the  Property  covered by such Lien for the purposes for which
such Property is held by the Borrower or any Subsidiary or materially impair the
value of such Property  subject  thereto;  (e) Liens arising solely by virtue of
any  statutory or common law  provision  relating to banker's  liens,  rights of
set-off or similar  rights and remedies and burdening  only deposit  accounts or

                                       8

other funds maintained with a creditor depository institution,  provided that no
such deposit  account is a dedicated  cash  collateral  account or is subject to
restrictions  against  access by the  depositor  in excess of those set forth by
regulations  promulgated by the Board and no such deposit account is intended by
Borrower or any of its  Subsidiaries  to provide  collateral  to the  depository
institution;  (f)  easements,  restrictions,  servitudes,  permits,  conditions,
covenants,  exceptions  or  reservations  in any Property of the Borrower or any
Subsidiary   for  the   purpose  of  roads,   pipelines,   transmission   lines,
transportation  lines,  distribution  lines for the removal of gas, oil, coal or
other minerals or timber,  and other like  purposes,  or for the joint or common
use of real  estate,  rights  of way,  facilities  and  equipment,  which in the
aggregate do not materially  impair the use of such Property for the purposes of
which such  Property is held by the  Borrower or any  Subsidiary  or  materially
impair  the  value  of such  Property  subject  thereto;  (g)  Liens  on cash or
securities  pledged to secure  performance of tenders,  surety and appeal bonds,
government  contracts,  performance  and  return  of money  bonds,  bids,  trade
contracts,  leases,  statutory  obligations,  regulatory  obligations  and other
obligations of a like nature incurred in the ordinary course of business and (h)
judgment and attachment  Liens not giving rise to an Event of Default,  provided
that any appropriate  legal  proceedings  which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the period
within  which such  proceeding  may be  initiated  shall not have expired and no
action to enforce  such Lien has been  commenced;  provided,  further that Liens
described in clauses (a) through (e) shall remain  "Excepted  Liens" only for so
long as no action to enforce  such Lien has been  commenced  and no intention to
subordinate the first priority Lien granted in favor of the Administrative Agent
and the Lenders is to be hereby implied or expressed by the permitted  existence
of such Excepted Liens.

         "Excluded Taxes" means, with respect to the  Administrative  Agent, any
          --------------
Lender,  the Issuing Bank or any other recipient of any payment to be made by or
on account of any obligation of the Borrower or any Guarantor hereunder or under
any other Loan Document,  (a) income or franchise  taxes imposed on (or measured
by) its net  income by the United  States of America or such other  jurisdiction
under the laws of which such  recipient is  organized or in which its  principal
office is located or, in the case of any Lender, in which its applicable lending
office is located,  (b) any branch profits taxes imposed by the United States of
America  or any  similar  tax  imposed  by any other  jurisdiction  in which the
Borrower or any  Guarantor  is located and (c) in the case of a Foreign  Lender,
any withholding tax that is imposed on amounts payable to such Foreign Lender at
the time such Foreign  Lender becomes a party to this Agreement (or designates a
new lending  office) or is  attributable  to such  Foreign  Lender's  failure to
comply with Section  5.03(e),  except to the extent that such Foreign Lender (or
its assignor,  if any) was entitled, at the time of designation of a new lending
office (or  assignment),  to receive  additional  amounts  with  respect to such
withholding tax pursuant to Section 5.03(a) or Section 5.03(c).

         "Existing  Credit  Agreement" means that certain Credit Agreement dated
          ---------------------------
as of June 30, 1998,  among the Borrower,  Bank of America,  N.A., as agent, and
the  lenders  party  thereto,  as the  same  has  been  heretofore  amended  and
supplemented from time to time.

         "Federal Funds Effective Rate" means, for any day, the weighted average
          ----------------------------
(rounded  upwards,  if  necessary,  to the  next  1/100  of 1%) of the  rates on
overnight Federal funds  transactions with members of the Federal Reserve System
arranged by Federal funds brokers,  as published on the next succeeding Business
Day by the  Federal  Reserve  Bank  of New  York,  or,  if  such  rate is not so

                                       9

published for any day that is a Business Day, the average (rounded  upwards,  if
necessary,  to the  next  1/100 of 1%) of the  quotations  for such day for such
transactions  received  by the  Administrative  Agent from three  Federal  funds
brokers of recognized standing selected by it.

         "Financial  Officer"  means  the  chief  financial  officer,  principal
          ------------------
accounting officer, treasurer or controller of the Borrower.

         "Financial  Statements" means the financial  statement or statements of
          ---------------------
the Borrower and its Consolidated Subsidiaries referred to in Section 7.04(a).

         "5.75%  Senior  Convertible  Notes"  means those  certain  5.75% Senior
          ---------------------------------
Convertible  Notes due 2022, in the aggregate  amount of $100,000,000  issued by
the Borrower March 20, 2002.

         "Foreign Lender" means any Lender that is organized under the laws of a
          --------------
jurisdiction  other than that in which the Borrower is located.  For purposes of
this  definition,  the United  States of  America,  each State  thereof  and the
District of Columbia shall be deemed to constitute a single jurisdiction.

         "Former  Agent"  means Bank of America,  N.A.,  as agent for the Former
          -------------
Lenders under the Existing Credit Agreement.

         "Former  Lenders"  means  the  lenders  party  to the  Existing  Credit
          ---------------
Agreement.

         "GAAP" means  generally  accepted  accounting  principles in the United
          ----
States of  America  as in  effect  from  time to time  subject  to the terms and
conditions set forth in Section 1.05.

         "Governmental  Authority"  means the government of the United States of
          -----------------------
America, any other nation or any political subdivision thereof, whether state or
local,  and any agency,  authority,  instrumentality,  regulatory  body,  court,
central  bank or  other  entity  exercising  executive,  legislative,  judicial,
taxing,  regulatory  or  administrative  powers or functions of or pertaining to
government over the Borrower, any Material Subsidiary,  any of their Properties,
any Agent, the Issuing Bank or any Lender.

         "Governmental  Requirement"  means any law, statute,  code,  ordinance,
          -------------------------
order, determination, rule, regulation, judgment, decree, injunction, franchise,
permit, certificate,  license,  authorization or other directive or requirement,
whether  now  or  hereinafter   in  effect,   including,   without   limitation,
Environmental  Laws,  energy  regulations  and  occupational,  safety and health
standards or controls, of any Governmental Authority.

         "Guarantors" means the Material Subsidiaries, and each other Subsidiary
          ----------
that guarantees the Indebtedness pursuant to Section 8.14(b).

         "Guaranty  Agreement" means an agreement  executed by the Guarantors in
          -------------------
substantially  the form of Exhibit D-2, as the same may be amended,  modified or
supplemented from time to time.

                                       10

         "Highest Lawful Rate" means,  with respect to each Lender,  the maximum
          -------------------
nonusurious  interest rate, if any, that at any time or from time to time may be
contracted  for, taken,  reserved,  charged or received on the Notes or on other
Indebtedness  under laws of the State of Texas which are presently in effect or,
to the extent allowed by law, under such  applicable laws which may hereafter be
in effect  and  which  allow a higher  maximum  nonusurious  interest  rate than
applicable laws allow as of the date hereof.

         "Hydrocarbon Interests" means all rights, titles, interests and estates
          ---------------------
now or  hereafter  acquired in and to oil and gas leases,  oil,  gas and mineral
leases, or other liquid or gaseous  hydrocarbon  leases,  mineral fee interests,
overriding  royalty and royalty  interests,  net profit interests and production
payment  interests,  including  any  reserved or residual  interests of whatever
nature.

         "Hydrocarbons"  means oil, gas, casinghead gas, drip gasoline,  natural
          ------------
gasoline, condensate,  distillate, liquid hydrocarbons, gaseous hydrocarbons and
all products refined or separated therefrom.

         "Indebtedness"  means any and all  amounts  owing or to be owing by the
          ------------
Borrower or any Guarantor:  (a) to the Administrative Agent, the Issuing Bank or
any Lender  under any Loan  Document;  (b) to any Lender or any  Affiliate  of a
Lender  under  any Swap  Agreements  entered  into  while  such  Person  (or its
Affiliate)  was a  Lender  hereunder  and (c) all  renewals,  extensions  and/or
rearrangements of any of the above.

         "Indemnified Taxes" means Taxes other than Excluded Taxes.
          -----------------

         "Information  Memorandum" means the Confidential Information Memorandum
          -----------------------
dated January 2003, relating to the Borrower and the Transactions.

         "Initial  Reserve  Report" means (a) the report of Ryder Scott Company,
          ------------------------
L.P.  dated as of January 1, 2002,  with respect to the value of the Oil and Gas
Properties  of the  Borrower and its  Material  Subsidiaries  as of December 31,
2001,  (b) the report of the Manager of  Reservoir  Engineering  of the Borrower
dated as of  October  1,  2002,  with  respect  to the  value of the Oil and Gas
Properties  of the Borrower and its Material  Subsidiaries  as of June 30, 2002,
and (iii) the report of the Manager of  Reservoir  Engineering  of the  Borrower
dated as of  November  1,  2002,  with  respect to the value of the Flying J and
Burlington Resources Properties.

         "Interest  Election Request" means a request by the Borrower to convert
          --------------------------
or continue a Borrowing in accordance with Section 2.04.

         "Interest  Payment  Date" means (a) with  respect to any ABR Loan,  the
          -----------------------
last day of each calendar month and (b) with respect to any Eurodollar Loan, the
last day of the Interest  Period  applicable to the Borrowing of which such Loan
is a part and, in the case of a Eurodollar  Borrowing with an Interest Period of
more  than  three  months'  duration,  each  day  prior  to the last day of such
Interest  Period that occurs at intervals of three  months'  duration  after the
first day of such Interest Period.

         "Interest Period" means with respect to any Eurodollar  Borrowing,  the
          ---------------
period  commencing on the date of such  Borrowing and ending on the  numerically
corresponding  day in the calendar  month that is one, two,  three or six months

                                       11

thereafter, as the Borrower may elect; provided, that (a) if any Interest Period
would end on a day other than a Business  Day,  such  Interest  Period  shall be
extended  to the next  succeeding  Business  Day  unless  such  next  succeeding
Business Day would fall in the next calendar  month, in which case such Interest
Period shall end on the next preceding  Business Day and (b) any Interest Period
pertaining to a Eurodollar  Borrowing that commences on the last Business Day of
a calendar  month (or on a day for which there is no  numerically  corresponding
day in the last calendar  month of such  Interest  Period) shall end on the last
Business Day of the last calendar  month of such Interest  Period.  For purposes
hereof,  the date of a  Borrowing  initially  shall  be the  date on which  such
Borrowing is made and thereafter  shall be the effective date of the most recent
conversion or continuation of such Borrowing.

         "Interim Redetermination" has the meaning assigned such term in Section
          -----------------------
2.07(b).

         "Interim Redetermination Date" means the date on which a Borrowing Base
          ----------------------------
that has been redetermined pursuant to an Interim Redetermination becomes
effective as provided in Section 2.07(d).

         "Investment"  means, for any Person:  (a) the acquisition  (whether for
          ----------
cash, Property,  services or securities or otherwise) of Equity Interests of any
other Person or any agreement to make any such acquisition  (including,  without
limitation,  any "short sale" or any sale of any  securities at a time when such
securities are not owned by the Person  entering into such short sale);  (b) the
making of any deposit  with, or advance,  loan or other  extension of credit to,
any other Person (including the purchase of Property from another Person subject
to an  understanding  or  agreement,  contingent  or  otherwise,  to resell such
Property to such Person,  but excluding  any such advance,  loan or extension of
credit having a term not exceeding  ninety (90) days  representing  the purchase
price of  inventory or supplies  sold by such Person in the  ordinary  course of
business)  or (c) the entering  into of any  guarantee  of, or other  contingent
obligation  (including  the  deposit  of any Equity  Interests  to be sold) with
respect  to,  Debt  or  other   liability  of  any  other  Person  and  (without
duplication)  any amount  committed  to be  advanced,  lent or  extended to such
Person.

         "Issuing Bank" means Wachovia, in its capacity as the issuer of Letters
          ------------
of Credit hereunder,  and its successors in such capacity as provided in Section
2.08(i).  The  Issuing  Bank may,  in its  discretion,  arrange  for one or more
Letters of Credit to be issued by  Affiliates of the Issuing Bank, in which case
the term "Issuing Bank" shall include any such Affiliate with respect to Letters
          ------------
of Credit issued by such Affiliate.

         "LC Commitment" at any time means $30,000,000.
          -------------

         "LC Disbursement"  means a payment made by the Issuing Bank pursuant to
          ---------------
a Letter of Credit.

         "LC Exposure" means, at any time, the sum of (a) the aggregate  undrawn
          -----------
amount of all outstanding  Letters of Credit at such time plus (b) the aggregate
amount of all LC Disbursements that have not yet been reimbursed by or on behalf
of the Borrower at such time. The LC Exposure of any Lender at any time shall be

                                       12

its Applicable Percentage of the total LC Exposure at such time.

         "Lenders"  means the  Persons  listed on Annex I, any Person that shall
          -------
have become a party hereto pursuant to an Assignment and Assumption,  other than
any such Person that ceases to be a party hereto  pursuant to an Assignment  and
Assumption,  and any Person  that shall have become a party  hereto  pursuant to
Section 2.06(c).

         "Letter of Credit" means any letter of credit  issued  pursuant to this
          ----------------
Agreement.

         "Letter of Credit  Agreements" means all letter of credit  applications
          ----------------------------
and other  agreements  (including any amendments,  modifications  or supplements
thereto)  submitted by the Borrower,  or entered into by the Borrower,  with the
Issuing Bank relating to any Letter of Credit.

         "LIBO Rate" means,  with respect to any  Eurodollar  Borrowing  for any
          ---------
Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service
(or on any successor or substitute page of such Service,  or any successor to or
substitute  for such  Service,  providing  rate  quotations  comparable to those
currently  provided  on  such  page  of  such  Service,  as  determined  by  the
Administrative  Agent from time to time for purposes of providing  quotations of
interest rates applicable to dollar deposits in the London interbank  market) at
approximately   11:00  a.m.,  London  time,  two  Business  Days  prior  to  the
commencement  of such Interest  Period,  as the rate for dollar  deposits with a
maturity  comparable to such Interest Period. In the event that such rate is not
available at such time for any reason, then the "LIBO Rate" with respect to such
                                                 ---------
Eurodollar  Borrowing for such Interest Period shall be the rate at which dollar
deposits of $5,000,000 and for a maturity comparable to such Interest Period are
offered  by  the  principal  London  office  of  the  Administrative   Agent  in
immediately  available  funds in the London  interbank  market at  approximately
11:00 a.m.,  London time,  two Business Days prior to the  commencement  of such
Interest Period.

         "Lien" means any interest in Property  securing an obligation  owed to,
          ----
or a claim by, a Person  other  than the  owner of the  Property,  whether  such
interest  is based on the common law,  statute or  contract,  and  whether  such
obligation or claim is fixed or contingent, and including but not limited to (a)
the lien or security  interest  arising  from a mortgage,  encumbrance,  pledge,
security agreement, conditional sale or trust receipt or a lease, consignment or
bailment for security  purposes or (b) production  payments and the like payable
out of Oil  and  Gas  Properties.  The  term  "Lien"  shall  include  easements,
                                               ----
restrictions,   servitudes,   permits,  conditions,   covenants,  exceptions  or
reservations.  For  the  purposes  of  this  Agreement,  the  Borrower  and  its
Subsidiaries  shall  be  deemed  to be the  owner of any  Property  which it has
acquired or holds subject to a  conditional  sale  agreement,  or leases under a
financing lease or other arrangement pursuant to which title to the Property has
been  retained by or vested in some other  Person in a  transaction  intended to
create a financing.

         "Loan Documents" means this Agreement,  the Notes, the Letter of Credit
          --------------
Agreements,  the Letters of Credit and the Security  Instruments.

         "Loans" means the loans made by the Lenders to the Borrower pursuant to
          -----
this Agreement.

                                       13

         "Majority  Lenders" means, at any time while no Loans or LC Exposure is
          -----------------
outstanding,  Lenders having at least sixty-six and two-thirds percent (66-2/3%)
of the Aggregate Commitments;  and at any time while any Loans or LC Exposure is
outstanding, Lenders holding at least sixty-six and two-thirds percent (66-2/3%)
of the  outstanding  aggregate  principal  amount of the Loans or  participation
interests  in  Letters  of Credit  (without  regard to any sale by a Lender of a
participation in any Loan under Section 12.04(c)).

         "Material  Adverse  Effect" means a material  adverse effect on (a) the
          -------------------------
business, assets, operations, prospects or condition, financial or otherwise, of
the  Borrower  and the  Subsidiaries  taken as a whole,  (b) the  ability of the
Borrower,  any  Subsidiary  or any  Guarantor to perform any of its  obligations
under any Loan Document or (c) the rights and remedies of or benefits  available
to the  Administrative  Agent,  the  Issuing  Bank or any Lender  under any Loan
Document.

         "Material  Agreements"  means  each  agreement  (whether  one or  more)
          --------------------
described or referred to on Schedule 7.24.

         "Material Indebtedness" means Debt (other than the Loans and Letters of
          ---------------------
Credit), or obligations in respect of one or more Swap Agreements, of any one or
more of the  Borrower and its  Subsidiaries  in an  aggregate  principal  amount
exceeding  $3,000,000.  For purposes of determining Material  Indebtedness,  the
"principal  amount" of the  obligations  of the  Borrower or any  Subsidiary  in
respect of any Swap Agreement at any time shall be the maximum  aggregate amount
(giving effect to any netting  agreements)  that the Borrower or such Subsidiary
would be required to pay if such Swap Agreement were terminated at such time.

         "Material  Subsidiary"  means a  Subsidiary  of  Borrower  that  owns a
          --------------------
Substantial Portion of the Property of Borrower and its Subsidiaries.

         "Maturity Date" means January 27, 2006.
          -------------

         "Maximum Credit Amount" means $300,000,000.
          ---------------------

         "Moody's"  means  Moody's  Investors  Service,  Inc. and any  successor
          -------
thereto that is a nationally recognized rating agency.

         "Mortgaged  Property"  means any Property  owned by the Borrower or any
          -------------------
Material  Subsidiary  which is subject to the Liens  existing and to exist under
the terms of the Security Instruments.

         "Multiemployer  Plan"  means a Plan  which is a  multiemployer  plan as
          -------------------
defined in section 3(37) or 4001 (a)(3) of ERISA.

         "New  Borrowing  Base  Notice"  has the meaning  assigned  such term in
          ----------------------------
Section 2.07(d).

         "Notes" means the promissory notes of the Borrower described in Section
          -----
2.02(d)  and being  substantially  in the form of Exhibit A,  together  with all
amendments, modifications, replacements, extensions and rearrangements thereof.

                                       14

         "Oil and Gas  Properties"  means  (a)  Hydrocarbon  Interests;  (b) the
          -----------------------
Properties now or hereafter pooled or unitized with Hydrocarbon  Interests;  (c)
all  presently   existing  or  future   unitization,   pooling   agreements  and
declarations  of pooled units and the units created thereby  (including  without
limitation  all  units  created  under  orders,  regulations  and  rules  of any
Governmental  Authority)  which may affect all or any portion of the Hydrocarbon
Interests;  (d)  all  operating  agreements,  contracts  and  other  agreements,
including  production  sharing contracts and agreements,  which relate to any of
the  Hydrocarbon  Interests  or the  production,  sale,  purchase,  exchange  or
processing of Hydrocarbons  from or attributable to such Hydrocarbon  Interests;
(e) all  Hydrocarbons  in and  under  and  which  may be  produced  and saved or
attributable to the Hydrocarbon  Interests,  including all oil in tanks, and all
rents, issues, profits, proceeds,  products,  revenues and other incomes from or
attributable to the  Hydrocarbon  Interests;  (f) all tenements,  hereditaments,
appurtenances and Properties in any manner appertaining,  belonging,  affixed or
incidental to the Hydrocarbon Interests and (g) all Properties,  rights, titles,
interests  and estates  described  or referred to above,  including  any and all
Property, real or personal, now owned or hereinafter acquired and situated upon,
used,  held for use or useful  in  connection  with the  operating,  working  or
development of any of such Hydrocarbon Interests or Property (excluding drilling
rigs,  automotive  equipment,  rental equipment or other personal Property which
may be on such  premises for the purpose of drilling a well or for other similar
temporary uses) and including any and all oil wells, gas wells,  injection wells
or other  wells,  buildings,  structures,  fuel  separators,  liquid  extraction
plants, plant compressors,  pumps, pumping units, field gathering systems, tanks
and tank batteries,  fixtures,  valves, fittings,  machinery and parts, engines,
boilers, meters, apparatus,  equipment,  appliances, tools, implements,  cables,
wires, towers, casing, tubing and rods, surface leases, rights-of-way, easements
and  servitudes  together  with  all  additions,  substitutions,   replacements,
accessions and attachments to any and all of the foregoing.

         "Other Taxes" means any and all present or future stamp or  documentary
          -----------
taxes or any other excise or Property  taxes,  charges or similar levies arising
from any payment made hereunder or from the  execution,  delivery or enforcement
of, or otherwise with respect to, this Agreement and any other Loan Document.

         "Participant" has the meaning set forth in Section 12.04(c)(i).
          -----------

         "PBGC" means the Pension Benefit Guaranty Corporation, or any successor
          ----
thereto.

         "Permitted   Refinancing   Debt"  means  Debt  (for  purposes  of  this
          ------------------------------
definition,  "new Debt") incurred in exchange for, or proceeds of which are used
              --------
to refinance,  all of any other Debt (the "Refinanced Debt");  provided that (a)
                                           ---------------
such new Debt is in an  aggregate  principal  amount not in excess of the sum of
(i) the aggregate  principal amount then outstanding of the Refinanced Debt (or,
if the  Refinanced  Debt is  exchanged  or acquired  for an amount less than the
principal   amount  thereof  to  be  due  and  payable  upon  a  declaration  of
acceleration  thereof,  such lesser amount) and (ii) an amount  necessary to pay
any  fees  and  expenses,  including  premiums,  related  to  such  exchange  or
refinancing;  (b) such new Debt has a stated maturity no earlier than the stated
maturity of the Refinanced  Debt and an average life no shorter than the average
life of the Refinanced  Debt; (c) such new Debt does not have a stated  interest

                                       15

rate in excess of the stated interest rate of the Refinanced  Debt; (d) such new
Debt does not contain any  covenants  which are more onerous to the Borrower and
its Subsidiaries than those imposed by the Refinanced Debt and (e) such new Debt
(and  any  guarantees  thereof)  is  subordinated  in right  of  payment  to the
Indebtedness  (or, if applicable,  the Guaranty  Agreement) to at least the same
extent  as  the  Refinanced   Debt  and  is  otherwise   subordinated  on  terms
substantially reasonably satisfactory to the Administrative Agent.

         "Person"  means any  natural  person,  corporation,  limited  liability
          ------
company, trust, joint venture, association,  company, partnership,  Governmental
Authority or other entity.

         "Plan" means any employee  pension  benefit plan, as defined in section
          ----
3(2) of ERISA,  which (a) is  currently or hereafter  sponsored,  maintained  or
contributed to by the Borrower, a Subsidiary or an ERISA Affiliate or (b) was at
any time during the six calendar  years  preceding  the date hereof,  sponsored,
maintained  or  contributed  to by the  Borrower  or a  Subsidiary  or an  ERISA
Affiliate.

         "Pledge - Borrower"  means that certain  Pledge and Security  Agreement
          -----------------
from  the  Borrower  in  favor  of the  Administrative  Agent,  pledging  to the
Administrative  Agent as security for the Indebtedness all equity interests held
by the  Borrower  in  the  Material  Subsidiaries  (other  than  NPC  Inc.),  in
substantially  the form of Exhibit D-3, as the same may be amended,  modified or
supplemented from time to time.

         "Pledge - Nance" means that certain Pledge and Security  Agreement from
          --------------
Nance Petroleum  Corporation in favor of the Administrative  Agent,  pledging to
the  Administrative  Agent as security for the Indebtedness all equity interests
held by Nance Petroleum  Corporation in NPC Inc., in  substantially  the form of
Exhibit D-4, as the same may be amended,  modified or supplemented  from time to
time.

         "Prime  Rate" means the rate of interest per annum  publicly  announced
          -----------
from  time to time by  Wachovia  as its prime  rate in  effect at its  principal
office in  Charlotte,  North  Carolina;  each  change in the Prime Rate shall be
effective from and including the date such change is publicly announced as being
effective. Such rate is set by Wachovia as a general reference rate of interest,
taking into  account such  factors as Wachovia  may deem  appropriate;  it being
understood  that many of  Wachovia  s  commercial  or other  loans are priced in
relation  to such  rate,  that it is not  necessarily  the  lowest  or best rate
actually  charged to any customer and that Wachovia may make various  commercial
or other loans at rates of interest having no relationship to such rate.

         "Property" means any interest in any kind of property or asset, whether
          --------
real,  personal  or  mixed,  or  tangible  or  intangible,   including,  without
limitation, cash, securities, accounts and contract rights.

         "Proposed  Borrowing  Base" has the  meaning  assigned  to such term in
          -------------------------
Section 2.07(c)(i).

         "Proposed  Borrowing Base Notice" has the meaning assigned to such term
          -------------------------------
in Section 2.07(c)(ii).

         "Purchase and Sale Agreement" has the meaning assigned such term in the
          ---------------------------
definition of Acquisition.

                                       16

         "Redemption" means the repurchase, redemption, prepayment, repayment or
          ----------
defeasance (or the segregation of funds with respect to any of the foregoing) of
the Material Indebtedness. "Redeem" has the correlative meaning thereto.
                            ------

         "Redetermination   Date"   means,   with   respect  to  any   Scheduled
          ----------------------
Redetermination or any Interim  Redetermination,  the date that the redetermined
Borrowing Base related thereto becomes effective pursuant to Section 2.07(d).

         "Refinanced  Debt" has the meaning assigned such term in the definition
          ----------------
of "Permitted Refinancing Debt".

         "Register" has the meaning assigned such term in Section 12.04(b)(iv).
          --------

         "Regulation  D" means  Regulation  D of the  Board,  as the same may be
          -------------
amended, supplemented or replaced from time to time.

         "Related  Parties" means,  with respect to any specified  Person,  such
          ----------------
Person's Affiliates and the respective directors,  officers,  employees,  agents
and advisors of such Person and such Person's Affiliates.

         "Remedial Work" has the meaning assigned such term in Section 8.10(a).
          -------------

         "Reserve  Report"  means a  report,  in form and  substance  reasonably
          ---------------
satisfactory  to the  Administrative  Agent,  setting forth, as of each December
31st  or  June  30th  (or  such   other   date  in  the  event  of  an   Interim
Redetermination)  the  oil  and  gas  reserves  attributable  to the Oil and Gas
Properties  of the  Borrower  and the  Material  Subsidiaries,  together  with a
projection of the rate of  production  and future net income,  taxes,  operating
expenses and capital  expenditures  with respect thereto as of such date,  based
upon the pricing assumptions  consistent with SEC reporting  requirements at the
time.

         "Responsible  Officer"  means,  as to any Person,  the Chief  Executive
          --------------------
Officer,  the  President,  any Financial  Officer or any Vice  President of such
Person.  Unless  otherwise  specified,  all references to a Responsible  Officer
herein shall mean a Responsible Officer of the Borrower.

         "Restricted Payment" means any dividend or other distribution  (whether
          ------------------
in cash,  securities or other Property) with respect to any Equity  Interests in
the Borrower,  or any payment  (whether in cash,  securities or other Property),
including  any  sinking  fund or similar  deposit,  on account of the  purchase,
redemption,  retirement,  acquisition,  cancellation  or termination of any such
Equity  Interests  in the  Borrower  or any  option,  warrant or other  right to
acquire any such Equity Interests in the Borrower.

         "Revolving  Credit Exposure"  means,  with respect to any Lender at any
          --------------------------
time, the sum of the outstanding principal amount of such Lender's Loans and its
LC Exposure at such time.

         "Scheduled  Redetermination"  has the  meaning  assigned  such  term in
          --------------------------
Section 2.07(b).

                                       17

         "Scheduled  Redetermination  Date"  means the date on which a Borrowing
          --------------------------------
Base that has been redetermined pursuant to a Scheduled  Redetermination becomes
effective as provided in Section 2.07(d).

         "SEC" means the  Securities  and Exchange  Commission  or any successor
          ---
Governmental Authority.

         "Security  Instruments" means the Guaranty  Agreement,  the Pledge, all
          ---------------------
assignments,  mortgages, deeds of trust, amendments and supplements to mortgages
and  deeds of trust,  and all  other  agreements,  instruments  or  certificates
described  or  referred  to in Exhibit  D-1,  and any and all other  agreements,
instruments  or  certificates  now or hereafter  executed  and  delivered by the
Borrower or any other Person (other than Swap Agreements with the Lenders or any
Affiliate of a Lender or participation or similar  agreements between any Lender
and any other lender or creditor  with respect to any  Indebtedness  pursuant to
this  Agreement)  in  connection  with,  or  as  security  for  the  payment  or
performance of the  Indebtedness,  the Notes,  this Agreement,  or reimbursement
obligations  under the  Letters of Credit,  as such  agreements  may be amended,
modified, supplemented or restated from time to time.

         "S&P" means Standard &  Poor's Ratings Group, a division of The
          -------
McGraw-Hill  Companies,  Inc.,  and any  successor  thereto that is a nationally
recognized rating agency.

         "Statutory Reserve Rate" means a fraction (expressed as a decimal), the
          ----------------------
numerator of which is the number one and the  denominator of which is the number
one minus the  aggregate  of the  maximum  reserve  percentages  (including  any
marginal,  special,  emergency or supplemental  reserves) expressed as a decimal
established  by the Board to which the  Administrative  Agent is  subject,  with
respect to the Adjusted LIBO Rate, for eurocurrency  funding (currently referred
to as  "Eurocurrency  Liabilities"  in Regulation D of the Board).  Such reserve
percentages   shall  include  those  imposed  pursuant  to  such  Regulation  D.
Eurodollar  Loans shall be deemed to constitute  eurocurrency  funding and to be
subject to such reserve requirements without benefit of or credit for proration,
exemptions  or  offsets  that may be  available  from time to time to any Lender
under such Regulation D or any comparable regulation. The Statutory Reserve Rate
shall be adjusted automatically on and as of the effective date of any change in
any reserve percentage.

         "Subsidiary"  means: (a) any Person of which at least a majority of the
          ----------
outstanding  Equity  Interests having by the terms thereof ordinary voting power
to elect a majority of the board of directors,  manager or other  governing body
of such Person  (irrespective  of whether or not at the time Equity Interests of
any other class or classes of such Person  shall have or might have voting power
by  reason of the  happening  of any  contingency)  is at the time  directly  or
indirectly  owned  or  controlled  by  the  Borrower  or  one  or  more  of  its
Subsidiaries or by the Borrower and one or more of its  Subsidiaries and (b) any
partnership  of which  the  Borrower  or any of its  Subsidiaries  is a  general
partner.   Unless  otherwise  indicated  herein,  each  reference  to  the  term
"Subsidiary" shall mean a Subsidiary of the Borrower.

         "Substantial  Portion"  means,  with  respect  to the  Property  of the
          --------------------
Borrower and its  Subsidiaries,  Property which  represents more than 10% of the
consolidated  assets of the Borrower and its  Subsidiaries  or property which is
responsible  for  more  than  10%  of  the  consolidated  net  sales  or of  the

                                       18

consolidated net income of the Borrower and its  Subsidiaries,  in each case, as
would be shown in the consolidated  financial statements of the Borrower and its
Subsidiaries  as at the  beginning of the  twelve-month  period  ending with the
month in which such  determination is made (or if financial  statements have not
been delivered  hereunder for that month which begins the  twelve-month  period,
then  the  financial  statements  delivered  hereunder  for the  quarter  ending
immediately prior to that month).

         "Swap Agreement" means any agreement with respect to any swap, forward,
          --------------
future  or  derivative  transaction  or  option or  similar  agreement,  whether
exchange  traded,  "over-the-counter"  or  otherwise,  involving,  or settled by
reference  to,  one or  more  rates,  currencies,  commodities,  equity  or debt
instruments or securities, or economic, financial or pricing indices or measures
of economic,  financial or pricing risk or value or any similar  transaction  or
any combination of these transactions; provided that no phantom stock or similar
plan  providing for payments only on account of services  provided by current or
former  directors,  officers,  employees or  consultants  of the Borrower or the
Subsidiaries shall be a Swap Agreement.

         "Synthetic  Leases" means,  in respect of any Person,  all leases which
          -----------------
shall have  been,  or should  have been,  in  accordance  with GAAP,  treated as
operating  leases on the  financial  statements  of the Person  liable  (whether
contingently  or otherwise)  for the payment of rent  thereunder  and which were
properly treated as indebtedness for borrowed money for purposes of U.S. federal
income taxes,  if the lessee in respect  thereof is obligated to either purchase
for an amount in excess  of, or pay upon early  termination  an amount in excess
of, 80% of the residual value of the Property  subject to such  operating  lease
upon expiration or early termination of such lease.

         "Taxes"  means any and all present or future  taxes,  levies,  imposts,
          -----
duties,  deductions,   charges  or  withholdings  imposed  by  any  Governmental
Authority.

         "Termination  Date" means the earlier of the Maturity Date and the date
          -----------------
of termination of the Commitments.

         "Total  Debt"  means,  at any date,  all Debt of the  Borrower  and the
          -----------
Consolidated  Subsidiaries  on a consolidated  basis,  exclusive of all accounts
payable, accrued expenses,  liabilities or other obligations to pay the deferred
purchase price of Property or services to the extent any of same was included in
Debt of the Borrower and the Consolidated Subsidiaries on a consolidated basis.

         "Transactions" means, with respect to (a) the Borrower,  the execution,
          ------------
delivery and performance by the Borrower of this Agreement,  and each other Loan
Document to which it is a party, the borrowing of Loans, the use of the proceeds
thereof and the issuance of Letters of Credit hereunder,  and the grant of Liens
by the Borrower on Mortgaged  Properties  and other  Properties  pursuant to the
Security Instruments and (b) each Material Subsidiary,  the execution,  delivery
and performance by such Material Subsidiary of each Loan Document to which it is
a party, the guaranteeing of the  Indebtedness and the other  obligations  under
the  Guaranty   Agreement  by  such  Material   Subsidiary   and  such  Material
Subsidiary's  grant  of the  security  interests  and  provision  of  collateral
thereunder,  and the grant of Liens by such  Material  Subsidiary  on  Mortgaged
Properties and other Properties pursuant to the Security Instruments.

                                       19

         "Type",  when used in  reference  to any Loan or  Borrowing,  refers to
          ----
whether  the rate of  interest  on such Loan,  or on the Loans  comprising  such
Borrowing, is determined by reference to the Alternate Base Rate or the Adjusted
LIBO Rate.

         "Wholly-Owned  Subsidiary"  means  any  Subsidiary  of which all of the
          ------------------------
outstanding  Equity  Interests  (other  than any  directors'  qualifying  shares
mandated by applicable law), on a fully-diluted basis, are owned by the Borrower
or one or more of the  Wholly-Owned  Subsidiaries  or by the Borrower and one or
more of the Wholly-Owned Subsidiaries.

         Section  1.03  Types of Loans  and  Borrowings.  For  purposes  of this
                        -------------------------------
Agreement, Loans and Borrowings, respectively, may be classified and referred to
by Type (e.g., a "Eurodollar Loan" or a "Eurodollar Borrowing").
                  ---------------

         Section 1.04 Terms  Generally.  The  definitions  of terms herein shall
                      ----------------
apply  equally to the singular and plural forms of the terms  defined.  Whenever
the context may require, any pronoun shall include the corresponding  masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed  by the phrase  "without  limitation".  The word "will"
shall be  construed  to have the same  meaning  and effect as the word  "shall".
Unless the context requires  otherwise (a) any definition of or reference to any
agreement,  instrument or other document  herein shall be construed as referring
to such  agreement,  instrument or other  document as from time to time amended,
supplemented  or  otherwise  modified  (subject  to  any  restrictions  on  such
amendments,  supplements or modifications  set forth herein),  (b) any reference
herein to any Person shall be construed to include such Person's  successors and
assigns (subject to the restrictions  contained herein), (c) the words "herein",
"hereof" and  "hereunder",  and words of similar  import,  shall be construed to
refer to this  Agreement  in its entirety  and not to any  particular  provision
hereof and (d) all references herein to Articles,  Sections,  Annexes,  Exhibits
and  Schedules  shall be  construed  to refer to Articles  and  Sections of, and
Annexes, Exhibits and Schedules to, this Agreement.

         Section  1.05  Accounting  Terms  and   Determinations;   GAAP.  Unless
                        -----------------------------------------------
otherwise   specified  herein,   all  accounting  terms  used  herein  shall  be
interpreted,  all  determinations  with respect to accounting  matters hereunder
shall be made, and all financial  statements and  certificates and reports as to
financial  matters required to be furnished to the  Administrative  Agent or the
Lenders hereunder shall be prepared, in accordance with GAAP, applied on a basis
consistent with the Financial  Statements except for changes in which Borrower's
independent  certified  public  accountants  concur and which are  disclosed  to
Administrative Agent on the next date on which financial statements are required
to be  delivered  to the Lenders  pursuant to Section  8.01(a);  provided  that,
unless the Borrower and the Majority Banks shall otherwise agree in writing,  no
such  change  shall  modify or affect  the manner in which  compliance  with the
covenants  contained herein is computed such that all such computations shall be
conducted  utilizing  financial  information  presented  consistently with prior
periods.

                                       20

                                   ARTICLE II
                                   The Credits

         Section 2.01 Commitments. Subject to the terms and conditions set forth
                      -----------
herein, each Lender agrees to make Loans to the Borrower during the Availability
Period  in an  aggregate  principal  amount  that  will not  result  in (a) such
Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the
Aggregate Revolving Credit Exposures exceeding the Aggregate Commitments. Within
the foregoing  limits and subject to the terms and  conditions set forth herein,
the Borrower may borrow, repay and reborrow the Loans.

         Section 2.02 Loans and Borrowings.
                      --------------------

               (a) Borrowings;  Several Obligations.  Each Loan shall be made as
                   --------------------------------
part  of a  Borrowing  consisting  of  Loans  made  by the  Lenders  ratably  in
accordance with their respective Commitments.  The failure of any Lender to make
any Loan  required to be made by it shall not  relieve  any other  Lender of its
obligations  hereunder;  provided that the Commitments are several and no Lender
shall be responsible for any other Lender's failure to make Loans as required.

               (b) Types of Loans. Subject to Section 3.03, each Borrowing shall
                   --------------
be  comprised  entirely of ABR Loans or  Eurodollar  Loans as the  Borrower  may
request  in  accordance  herewith.  Each  Lender  at its  option  may  make  any
Eurodollar  Loan by causing any domestic or foreign  branch or Affiliate of such
Lender to make such Loan;  provided  that any  exercise of such option shall not
affect the obligation of the Borrower to repay such Loan in accordance  with the
terms of this Agreement.

               (c) Minimum Amounts;  Limitation on Number of Borrowings.  At the
                   ----------------------------------------------------
commencement  of  each  Interest  Period  for  any  Eurodollar  Borrowing,  such
Borrowing  shall be in an  aggregate  amount  that is an  integral  multiple  of
$1,000,000 and not less than $3,000,000.  At the time that each ABR Borrowing is
made,  such  Borrowing  shall  be in an  aggregate  amount  that is an  integral
multiple  of  $500,000  and  not  less  than  $1,000,000;  provided  that an ABR
Borrowing  may be in an  aggregate  amount  that is equal to the  entire  unused
balance  of  the  total   Commitments   or  that  is  required  to  finance  the
reimbursement  of  an  LC  Disbursement  as  contemplated  by  Section  2.08(e).
Borrowings of more than one Type may be outstanding  at the same time;  provided
that  there  shall  not at any time be more  than a total of six (6)  Eurodollar
Borrowings  outstanding.  Notwithstanding any other provision of this Agreement,
the  Borrower  shall not be  entitled  to  request,  or to elect to  convert  or
continue,  any Borrowing if the Interest  Period  requested with respect thereto
would end after the Maturity Date.

               (d) Notes.  The Loans made by each Lender shall be evidenced by a
                   -----
single  promissory note of the Borrower in substantially  the form of Exhibit A,
dated,  in the  case of (i)  any  Lender  party  hereto  as of the  date of this
Agreement,  as of the date of this  Agreement,  (ii) any Lender  that  becomes a
party hereto pursuant to an Assignment and Assumption,  as of the effective date
of the  assignment  and  assumption,  or (iii) any Lender  that  becomes a party
hereto in connection  with an increase in the Aggregate  Commitment  pursuant to
Section 2.06(c), as of the effective date of such increase, payable to the order
of such Lender in a principal  amount  equal to its  Commitment  as in effect on
such  date,  and  otherwise  duly  completed.  In the  event  that any  Lender's
Commitment  increases or decreases for any reason  (whether  pursuant to Section

                                       21

2.06, Section 12.04(b) or otherwise),  the Borrower shall deliver or cause to be
delivered on the effective date of such increase or decrease, a new Note payable
to the order of such Lender in a principal  amount equal to its Commitment after
giving effect to such increase or decrease,  and otherwise duly  completed.  The
date, amount,  Type,  interest rate and, if applicable,  Interest Period of each
Loan made by each  Lender,  and all  payments  made on account of the  principal
thereof,  shall be recorded by such Lender on its books for its Note, and, prior
to any transfer,  may be endorsed by such Lender on a schedule  attached to such
Note or any  continuation  thereof or on any separate record  maintained by such
Lender.  Failure to make any such  notation  or to attach a  schedule  shall not
affect any Lender's or the  Borrower's  rights or obligations in respect of such
Loans or affect the validity of such transfer by any Lender of its Note.

         Section  2.03  Requests  for  Borrowings  To request a  Borrowing,  the
                        -------------------------
Borrower shall notify the Administrative  Agent of such request by telephone (a)
in the case of a  Eurodollar  Borrowing,  not later than 1:00  p.m.,  Charlotte,
North  Carolina  time,  three  Business  Days  before  the date of the  proposed
Borrowing  or (b) in the case of a ABR  Borrowing,  not later  than  1:00  p.m.,
Charlotte, North Carolina time, one Business Day before the date of the proposed
Borrowing;  provided  that any such  notice of an ABR  Borrowing  to finance the
reimbursement  of an LC  Disbursement  as contemplated by Section 2.08(e) may be
given not later than 11:00 a.m., Charlotte,  North Carolina time, on the date of
the  proposed  Borrowing.  Each  such  telephonic  Borrowing  Request  shall  be
irrevocable and shall be confirmed  promptly by hand delivery or telecopy to the
Administrative  Agent of a written  Borrowing  Request in a form approved by the
Administrative  Agent and  signed by the  Borrower.  Each  such  telephonic  and
written Borrowing Request shall specify the following  information in compliance
with Section 2.02:

                    (i) the aggregate amount of the requested Borrowing;

                    (ii) the date of such  Borrowing,  which shall be a Business
          Day;

                    (iii) whether such  Borrowing is to be an ABR Borrowing or a
          Eurodollar Borrowing;

                    (iv) in the  case of a  Eurodollar  Borrowing,  the  initial
          Interest  Period to be  applicable  thereto,  which  shall be a period
          contemplated by the definition of the term "Interest Period";

                    (v) the amount of the then  effective  Borrowing  Base,  the
          current  Aggregate  Revolving Credit Exposures  (without regard to the
          requested  Borrowing)  and the pro forma  Aggregate  Revolving  Credit
          Exposures (giving effect to the requested Borrowing); and

                    (vi) the  location and number of the  Borrower's  account to
          which  funds  are  to  be  disbursed,  which  shall  comply  with  the
          requirements of Section 2.05.

If no election as to the Type of  Borrowing  is  specified,  then the  requested
Borrowing  shall be an ABR  Borrowing.  If no Interest  Period is specified with
respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed
to have  selected an Interest  Period of one month's  duration.  Each  Borrowing
Request  shall  constitute  a  representation  that the amount of the  requested

                                       22

Borrowing shall not cause the Aggregate Revolving Credit Exposures to exceed the
Aggregate Commitments.

Promptly  following  receipt  of a  Borrowing  Request in  accordance  with this
Section 2.03, the  Administrative  Agent shall advise each Lender of the details
thereof  and of the  amount  of  such  Lender's  Loan  to be made as part of the
requested Borrowing.

         Section 2.04 Interest Elections.
                      ------------------

               (a) Conversion and Continuance. Each Borrowing initially shall be
                   --------------------------
of the Type specified in the applicable  Borrowing Request and, in the case of a
Eurodollar Borrowing, shall have an initial Interest Period as specified in such
Borrowing Request.  Thereafter, the Borrower may elect to convert such Borrowing
to a  different  Type  or to  continue  such  Borrowing  and,  in the  case of a
Eurodollar  Borrowing,  may elect Interest Periods therefor,  all as provided in
this Section  2.04.  The Borrower  may elect  different  options with respect to
different  portions of the affected  Borrowing,  in which case each such portion
shall be allocated  ratably among the Lenders holding the Loans  comprising such
Borrowing,  and the Loans  comprising  each such portion  shall be  considered a
separate Borrowing.

               (b) Interest Election  Requests.  To make an election pursuant to
                   ---------------------------
this Section 2.04,  the Borrower shall notify the  Administrative  Agent of such
election by  telephone  by the time that a Borrowing  Request  would be required
under  Section  2.03 if the  Borrower  were  requesting  a Borrowing of the Type
resulting  from such election to be made on the effective date of such election.
Each such telephonic Interest Election Request shall be irrevocable and shall be
confirmed promptly by hand delivery or telecopy to the Administrative Agent of a
written Interest Election Request in a form approved by the Administrative Agent
and signed by the Borrower.

               (c) Information in Interest  Election  Requests.  Each telephonic
                   -------------------------------------------
and written Interest Election Request shall specify the following information in
compliance with Section 2.02:

                    (i) the  Borrowing to which such Interest  Election  Request
          applies  and, if different  options are being  elected with respect to
          different  portions  thereof,  the portions thereof to be allocated to
          each  resulting  Borrowing  (in  which  case  the  information  to  be
          specified pursuant to Section 2.04(c)(iii) and (iv) shall be specified
          for each resulting Borrowing);

                    (ii) the  effective  date of the election  made  pursuant to
          such Interest Election Request, which shall be a Business Day;

                    (iii)  whether  the  resulting  Borrowing  is to  be an  ABR
          Borrowing or a Eurodollar Borrowing; and

                    (iv) if the resulting  Borrowing is a Eurodollar  Borrowing,
          the Interest  Period to be  applicable  thereto after giving effect to
          such election,  which shall be a period contemplated by the definition
          of the term "Interest Period".

                                       23

If any such Interest  Election Request requests a Eurodollar  Borrowing but does
not  specify  an  Interest  Period,  then the  Borrower  shall be deemed to have
selected an Interest Period of one month's duration.

               (d)  Notice to  Lenders  by the  Administrative  Agent.  Promptly
                    -------------------------------------------------
following  receipt of an Interest  Election Request,  the  Administrative  Agent
shall advise each Lender of the details thereof and of such Lender's  portion of
each resulting Borrowing.

               (e) Effect of Failure to Deliver Timely Interest Election Request
                   -------------------------------------------------------------
and Events of Default on Interest  Election.  If the Borrower fails to deliver a
- -------------------------------------------
timely Interest Election Request with respect to a Eurodollar Borrowing prior to
the end of the Interest Period applicable  thereto,  then, unless such Borrowing
is repaid as provided herein,  at the end of such Interest Period such Borrowing
shall be converted to an ABR Borrowing.  Notwithstanding  any contrary provision
hereof,  if an  Event  of  Default  has  occurred  and  is  continuing:  (i)  no
outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing
and (ii) unless repaid,  each Eurodollar  Borrowing shall be converted to an ABR
Borrowing at the end of the Interest Period applicable thereto.

         Section 2.05 Funding of Borrowings.
                      ---------------------

               (a)  Funding by Lenders.  Each Lender  shall make each Loan to be
                    ------------------
made  by it  hereunder  on  the  proposed  date  thereof  by  wire  transfer  of
immediately available funds by 2:00 p.m. Charlotte,  North Carolina time, to the
account of the  Administrative  Agent most  recently  designated  by it for such
purpose by notice to the Lenders.  The Administrative Agent will make such Loans
available to the Borrower by promptly crediting the amounts so received, in like
funds, to an account of the Borrower maintained with the Administrative Agent in
Charlotte,  North  Carolina and  designated  by the  Borrower in the  applicable
Borrowing Request;  provided that ABR Loans made to finance the reimbursement of
an LC  Disbursement  as  provided  in Section  2.08(e)  shall be remitted by the
Administrative Agent to the Issuing Bank.

               (b)   Presumption   of  Funding  by  the   Lenders.   Unless  the
                     --------------------------------------------
Administrative  Agent shall have received  written notice from a Lender prior to
the proposed date of any Borrowing  that such Lender will not make  available to
the   Administrative   Agent  such  Lender's  share  of  such   Borrowing,   the
Administrative  Agent may assume that such Lender has made such share  available
on such date in accordance  with Section  2.05(a) and may, in reliance upon such
assumption,  make  available to the  Borrower a  corresponding  amount.  In such
event,  if a Lender has not in fact made its share of the  applicable  Borrowing
available  to the  Administrative  Agent,  then the  applicable  Lender  and the
Borrower severally agree to pay to the Administrative  Agent forthwith on demand
such corresponding amount with interest thereon, for each day from and including
the date such amount is made available to the Borrower to but excluding the date
of payment to the  Administrative  Agent, at (i) in the case of such Lender, the
greater  of the  Federal  Funds  Effective  Rate  and a rate  determined  by the
Administrative  Agent in  accordance  with banking  industry  rules on interbank
compensation  or (ii) in the case of the Borrower,  the interest rate applicable
to ABR  Loans;  provided,  however,  such  demands  shall be made first upon the
                --------   -------
applicable Lender and then upon the Borrower. If such Lender pays such amount to
the  Administrative  Agent, then such amount shall constitute such Lender's Loan
included in such Borrowing.

                                       24

         Section  2.06   Termination,   Reduction   and  Increase  of  Aggregate
                         -------------------------------------------------------
Commitment.
- ----------

               (a)  Scheduled  Termination  of  Commitments.  Unless  previously
                    ---------------------------------------
terminated, the Commitments shall terminate on the Maturity Date. If at any time
the Maximum  Credit  Amount or the  Borrowing  Base is  terminated or reduced to
zero,  then  the  Commitments  shall  terminate  on the  effective  date of such
termination or reduction.

               (b)  Optional  Termination  and  Reduction  of  Aggregate  Credit
                    ------------------------------------------------------------
Amounts.
- -------

                    (i) The Borrower may at any time terminate,  or from time to
          time  reduce,  the  Aggregate  Commitment;   provided  that  (A)  each
          reduction of the Aggregate Commitment shall be in an amount that is an
          integral  multiple of $1,000,000 and not less than  $5,000,000 and (B)
          the Borrower  shall not terminate or reduce the  Aggregate  Commitment
          if, after giving effect to any  concurrent  prepayment of the Loans in
          accordance  with  Section  3.04(c),  the  Aggregate  Revolving  Credit
          Exposures would exceed the Aggregate Commitments.

                    (ii) The Borrower shall notify the  Administrative  Agent of
          any  election to terminate or reduce the  Aggregate  Commitment  under
          Section 2.06(b)(i) at least three Business Days prior to the effective
          date of such  termination or reduction,  specifying  such election and
          the effective date thereof.  Promptly following receipt of any notice,
          the  Administrative  Agent shall  advise the  Lenders of the  contents
          thereof.  Each  notice  delivered  by the  Borrower  pursuant  to this
          Section 2.06(b)(ii) shall be irrevocable. Any termination or reduction
          of  the  Aggregate  Commitment  shall  be  permanent  and  may  not be
          reinstated  except pursuant to Section 2.06(c).  Each reduction of the
          Aggregate  Commitment  shall be made  ratably  among  the  Lenders  in
          accordance with each Lender's Applicable Percentage.

               (c) Optional Increase in Aggregate Commitment.
                   -----------------------------------------

                    (i)  Subject  to  the   conditions   set  forth  in  Section
          2.06(c)(ii),  the Borrower may increase the Aggregate  Commitment then
          in effect by  increasing  the  Commitment  of a Lender or by causing a
          Person acceptable to the Administrative Agent that at such time is not
          a Lender to become a Lender (an "Additional Lender").
                                           -----------------

                    (ii)  Any  increase  in the  Aggregate  Commitment  shall be
          subject to the following additional conditions:

                         (A) such  increase  shall not be less than  $10,000,000
unless the Administrative Agent otherwise consents;

                         (B) no Default shall have occurred and be continuing at
the effective date of such increase;

                         (C)  on  the  effective  date  of  such  increase,   no
Eurodollar Borrowings shall be  outstanding  (or  if  any Eurodollar  Borrowings
are outstanding, then the effective date of such increase  shall be the last day
of the Interest Period in respect of such Eurodollar Borrowings);

                                       25

                         (D) each  Lender  shall have had the option to increase
its Commitment  by its  Applicable Percentage of  the amount  of such  increase;
provided that, no Lender's  Commitment may  be increased without  the consent of
- -------- ----
such Lender;

                         (E) if the Borrower  elects to increase  the  Aggregate
Commitment by  increasing  the  Commitment of  a Lender,  the Borrower  and such
Lender  shall  execute and  deliver to  the Administrative  Agent a  certificate
substantially in the form of Exhibit F-1 (a "Commitment Increase  Certificate"),
                                             --------------------------------
together with a processing and recordation fee of $3,500 payable by the Borrower
and the reimbursement by  the Borrower  of the  reasonable legal fees of counse
to the Administrative  Agent,  and the Borrower shall deliver a new Note  (after
presentation of  same  to  Borrower  by the Administrative Agent) payable to the
order of such Lender in a principal amount equal to its Commitment after  giving
effect to such increase, and otherwise duly completed;

                         (F) If the Borrower  elects to increase  the  Aggregate
Commitment by causing an Additional Lender to become a party to this  Agreement,
then the Borrower  and such  Additional Lender  shall execute and deliver to the
Administrative Agent a certificate substantially  in the form of Exhibit F-2 (an
"Additional Lender Certificate"), together with an Administrative  Questionnaire
 -----------------------------
and a processing and recordation fee of $3,500 payable by such Additional Lender
and the  reimbursement by the  Borrower  of the reasonable legal fees of counsel
to  the Administrative  Agent, and  the Borrower  shall  deliver  a Note  (after
presentation  of same to  Borrower by the  Administrative  Agent) payable to the
order of such  Additional Lender in a  principal amount equal to its Commitment,
and otherwise duly completed.

                    (iii) Subject to acceptance and recording  thereof  pursuant
          to Section 2.06(c)(iv), from and after the effective date specified in
          the  Commitment   Increase   Certificate  or  the  Additional   Lender
          Certificate (or if any Eurodollar Borrowings are outstanding, then the
          last  day of  the  Interest  Period  in  respect  of  such  Eurodollar
          Borrowings):  (A)  the  amount of the  Aggregate  Commitment  shall be
          increased as set forth  therein,  and (B) in the case of an Additional
          Lender  Certificate,  any  Additional  Lender party thereto shall be a
          party to this  Agreement  and the other  Loan  Documents  and have the
          rights and  obligations of a Lender under this Agreement and the other
          Loan Documents.  In addition,  the Lender or the Additional Lender, as
          applicable,  shall  purchase  a pro  rata  portion  of  the  Aggregate
          Revolving  Credit  Exposures  of each of the other  Lenders  (and such
          Lenders  hereby agree to sell and to take all such  further  action to
          effectuate such sale) such that each Lender  (including any Additional
          Lender,  if applicable)  shall hold its  Applicable  Percentage of the
          Aggregate  Revolving  Credit  Exposures  after  giving  effect  to the
          increase in the Aggregate Commitment;

                    (iv)  Upon  its  receipt  of  a  duly  completed  Commitment
          Increase Certificate or an Additional Lender Certificate,  executed by
          the Borrower and the Lender or the Borrower and the Additional  Lender
          party  thereto,  as  applicable,  the  processing  and  recording  fee
          referred to in Section 2.06(c)(ii),  the Administrative  Questionnaire
          referred to in Section  2.06(c)(ii),  if  applicable,  and the written
          consent  of the  Administrative  Agent to such  increase  required  by
          Section  2.06(c)(i),   the  Administrative  Agent  shall  accept  such
          Commitment  Increase  Certificate or Additional Lender Certificate and
          record the information  contained  therein in the Register required to

                                       26

          be  maintained  by  the  Administrative   Agent  pursuant  to  Section
          12.04(b)(iv).  No  increase  in  the  Aggregate  Commitment  shall  be
          effective for purposes of this  Agreement  unless it has been recorded
          in the Register as provided in this Section 2.06(c)(iv); and

                         (G) after giving effect to an increase in the Aggregate
Commitment, the  Aggregate  Commitment  shall  not  exceed  the  then  effective
Borrowing Base.

         Section 2.07 Borrowing Base.
                      --------------

               (a) Initial Borrowing Base. For the period from and including the
                   ----------------------
Effective Date until the  satisfaction  of the conditions  contained in 6.03(a),
the amount of the Borrowing Base shall be $175,000,000.  For the period from and
including the date of satisfaction of the conditions contained in 6.03(a) to the
date of  satisfaction  of the  conditions in 6.03(b) the amount of the Borrowing
Base shall be  $215,000,000.  Thereafter  the Borrowing  Base shall  increase to
$250,000,000 upon satisfaction of the conditions  contained in 6.03(b) and shall
remain  at  $250,000,000  to  but  excluding  the  first  Redetermination  Date.
Notwithstanding  the  foregoing,  the Borrowing Base shall be subject to further
adjustments from time to time pursuant to this Section 2.07 and Section 8.13(c),
Section 9.12(a) and Section 9.13.

               (b)  Scheduled and Interim  Redeterminations.  Subject to Section
                    ---------------------------------------
2.07(d),    the   Borrowing   Base   shall   be   redetermined   (a   "Scheduled
                                                                       ---------
Redetermination") no later than April 30 and October 31 of each year, commencing
- ---------------
April 30, 2003. In addition,  the Borrower may, by notifying the  Administrative
Agent  thereof,  and the  Administrative  Agent  may,  at the  direction  of the
Majority  Lenders,  by  notifying  the  Borrower  thereof,  one time  during any
12-month  period,  elect to cause the Borrowing Base to be redetermined  between
Scheduled  Redeterminations  (an "Interim  Redetermination")  in accordance with
                                  ------------------------
this Section 2.07.

               (c) Scheduled and Interim Redetermination Procedure.
                   -----------------------------------------------

                    (i)  Each   Scheduled   Redetermination   and  each  Interim
          Redetermination  shall be effectuated as follows:  Upon receipt by the
          Administrative  Agent of (A) the  Reserve  Report and the  certificate
          required to be delivered by the Borrower to the Administrative  Agent,
          in the  case  of a  Scheduled  Redetermination,  pursuant  to  Section
          8.12(a)  and  (c),  and,  in the case of an  Interim  Redetermination,
          pursuant to Section 8.12(b) and (c), and (B) such other reports,  data
          and  supplemental  information,  including,  without  limitation,  the
          information provided pursuant to Section 8.12(c), as may, from time to
          time,  be  reasonably  requested by the Majority  Lenders (the Reserve
          Report, such certificate and such other reports, data and supplemental
          information being the "Engineering Reports"), the Administrative Agent
                                 -------------------
          shall evaluate the information  contained in the  Engineering  Reports
          and shall, in good faith,  propose a new Borrowing Base (the "Proposed
                                                                        --------
          Borrowing   Base")  based  upon  such   information   and  such  other
          ----------------
          information  (including,  without  limitation,  the  status  of  title
          information with respect to the Oil and Gas Properties as described in
          the  Engineering  Reports and the  existence of any other Debt) as the
          Administrative  Agent deems appropriate and consistent with its normal
          oil and gas lending criteria as it exists at the particular time.

                                       27

                    (ii) The Administrative  Agent shall notify the Borrower and
          the Lenders of the Proposed  Borrowing Base (the  "Proposed  Borrowing
                                                             -------------------
          Base Notice"):
          -----------

                         (A) in the case of a Scheduled  Redetermination  (1) if
the Administrative Agent shall have received the Engineering Reports required to
be delivered by the Borrower pursuant to Section 8.12(a) and (c) in a timely and
complete  manner, then on or before March 15th and  September 15th of such  year
following the date of delivery or 66. if the Administrative Agent shall not have
received  the  Engineering  Reports  required to be  delivered by  the  Borrower
pursuant to Section 8.12(a)  and  (c) in a  timely  and  complete  manner,  then
promptly  after  the   Administrative  Agent  has  received complete Engineering
Reports from the Borrower and has had a reasonable  opportunity to determine the
Proposed  Borrowing Base in accordance with Section 2.07(c)(i); and

                         (B)  in  the  case  of  an   Interim   Redetermination,
promptly, and  in any  event, within fifteen (15) days after  the Administrative
Agent has received the required Engineering Reports.

                    (iii) Any Proposed  Borrowing  Base that would  increase the
          Borrowing  Base then in effect must be approved or deemed to have been
          approved  by  all  of  the   Lenders  as  provided  in  this   Section
          2.07(c)(iii);  and any Proposed  Borrowing Base that would decrease or
          maintain  the  Borrowing  Base then in effect  must be  approved or be
          deemed to have been  approved by the  Majority  Lenders as provided in
          this Section 2.07(c)(iii). Upon receipt of the Proposed Borrowing Base
          Notice,  each Lender  shall have  fifteen  (15) days to agree with the
          Proposed  Borrowing Base or disagree with the Proposed  Borrowing Base
          by  proposing  an  alternate  Borrowing  Base.  If at the  end of such
          fifteen  (15) days,  any Lender has not  communicated  its approval or
          disapproval in writing to the Administrative Agent, such silence shall
          be deemed to be an approval of the Proposed Borrowing Base. If, at the
          end of  such  15-day  period,  all of the  Lenders,  in the  case of a
          Proposed Borrowing Base that would increase the Borrowing Base then in
          effect, or the Majority Lenders,  in the case of a Proposed  Borrowing
          Base that  would  decrease  or  maintain  the  Borrowing  Base then in
          effect, have approved or deemed to have approved,  as aforesaid,  then
          the  Proposed  Borrowing  Base shall  become the new  Borrowing  Base,
          effective on the date specified in Section  2.07(d).  If, however,  at
          the end of such  15-day  period,  all of the  Lenders or the  Majority
          Lenders, as applicable,  have not approved or deemed to have approved,
          as   aforesaid,   then  for  purposes  of  this  Section   2.07,   the
          Administrative  Agent shall poll the Lenders to ascertain  the highest
          Borrowing Base then acceptable (aa) to the Majority  Lenders,  if such
          amount would  decrease the Borrowing  Base then in effect,  or (bb) to
          all of the Lenders,  if such amount would  increase the Borrowing Base
          then in effect,  which  amount shall  become the new  Borrowing  Base,
          effective on the date specified in Section 2.07(d).

               (d)  Effectiveness  of a  Redetermined  Borrowing  Base.  After a
                    --------------------------------------------------
redetermined  Borrowing  Base is approved or is deemed to have been  approved by
all of the  Lenders or  Majority  Lenders,  as  applicable,  pursuant to Section
2.07(c)(iii), the Administrative Agent shall notify the Borrower and the Lenders
of the  amount of the  redetermined  Borrowing  Base (the  "New  Borrowing  Base
                                                            --------------------
Notice"),  and such amount shall become the new  Borrowing  Base,  effective and
- ------
applicable to the Borrower, the Agents, the Issuing Bank and the Lenders:

                                       28

                         (A) in the case of a Scheduled Redetermination,  (1) if
the Administrative Agent shall have received the Engineering Reports required to
be delivered by the Borrower pursuant to Section 8.12(a) and (c) in a timely and
complete  manner, then  no later than  April 30 or  October  31, as  applicable,
following  such  notice,  or (2) if  the  Administrative  Agent  shall not  have
received  the  Engineering  Reports  required  to be delivered  by the  Borrower
pursuant to Section 8.12(a) and (c) in a timely and complete manner, then on the
Business Day next succeeding delivery of such notice; and

                         (B) in the case of an Interim  Redetermination,  on the
Business Day next succeeding delivery of such notice.

Such  amount  shall then  become  the  Borrowing  Base until the next  Scheduled
Redetermination  Date,  the  next  Interim  Redetermination  Date  or  the  next
adjustment  to the  Borrowing  Base under Section  8.13(c),  Section  9.12(a) or
Section  9.13,  whichever  occurs  first.   Notwithstanding  the  foregoing,  no
Scheduled  Redetermination  or Interim  Redetermination  shall become  effective
until the New Borrowing Base Notice related thereto is received by the Borrower.

         Section 2.08 Letters of Credit.
                      -----------------

               (a)  General.  Subject  to the  terms  and  conditions  set forth
                    -------
herein,  the  Borrower may request the issuance of Letters of Credit for its own
account  or for  the  account  of any of its  Material  Subsidiaries,  in a form
reasonably  acceptable to the Administrative  Agent and the Issuing Bank, at any
time and from time to time during the Availability  Period.  In the event of any
inconsistency  between the terms and  conditions of this Agreement and the terms
and conditions of any form of letter of credit  application  or other  agreement
submitted by the Borrower to, or entered into by the Borrower  with, the Issuing
Bank  relating  to any  Letter  of  Credit,  the terms  and  conditions  of this
Agreement shall control.

               (b) Notice of Issuance,  Amendment,  Renewal, Extension;  Certain
                   -------------------------------------------------------------
Conditions.  To request the  issuance  of a Letter of Credit (or the  amendment,
- ----------
renewal or extension of an  outstanding  Letter of Credit),  the Borrower  shall
hand  deliver  or  telecopy  (or  transmit  by  electronic   communication,   if
arrangements for doing so have been approved by the Issuing Bank) to the Issuing
Bank and the  Administrative  Agent  (not less than  five (5)  Business  Days in
advance of the requested  date of issuance,  amendment,  renewal or extension) a
notice:

                    (i)  requesting  the  issuance  of a  Letter  of  Credit  or
          identifying the Letter of Credit to be amended, renewed or extended;

                    (ii) specifying the date of issuance,  amendment, renewal or
          extension (which shall be a Business Day);

                    (iii)  specifying the date on which such Letter of Credit is
          to expire (which shall comply with Section 2.08(c));

                    (iv) specifying the amount of such Letter of Credit;

                                       29

                    (v)  specifying  the name  and  address  of the  beneficiary
          thereof and such other  information  as shall be necessary to prepare,
          amend, renew or extend such Letter of Credit; and

                    (vi)  specifying the amount of the then effective  Borrowing
          Base, the current Aggregate Revolving Credit Exposures (without regard
          to the requested Letter of Credit or the requested amendment,  renewal
          or  extension  of an  outstanding  Letter of Credit) and the pro forma
          Aggregate  Revolving Credit Exposures  (giving effect to the requested
          Letter of Credit or the requested  amendment,  renewal or extension of
          an outstanding Letter of Credit).

Each notice shall  constitute a  representation  that after giving effect to the
requested issuance,  amendment,  renewal or extension, as applicable, (i) the LC
Exposure  shall not exceed the LC Commitment  and (ii) the  Aggregate  Revolving
Credit Exposures shall not exceed the Aggregate Commitments.

If requested  by the Issuing  Bank,  the Borrower  also shall submit a letter of
credit  application on the Issuing Bank's  standard form in connection  with any
request for a Letter of Credit.

               (c)  Expiration  Date.  Each Letter of Credit  shall expire at or
                    ----------------
prior to the close of business on the earlier of (i) the date one year after the
date of the issuance of such Letter of Credit (or, in the case of any renewal or
extension  thereof,  one year after such renewal or extension)  and (ii) the date
that is five Business Days prior to the Maturity Date.

               (d) Participations.  By the issuance of a Letter of Credit (or an
                   --------------
amendment to a Letter of Credit  increasing the amount  thereof) and without any
further action on the part of the Issuing Bank or the Lenders,  the Issuing Bank
hereby grants to each Lender,  and each Lender hereby  acquires from the Issuing
Bank, a participation in such Letter of Credit equal to such Lender's Applicable
Percentage  of the aggregate  amount  available to be drawn under such Letter of
Credit. In consideration and in furtherance of the foregoing, each Lender hereby
absolutely and  unconditionally  agrees to pay to the Administrative  Agent, for
the account of the Issuing Bank, such Lender's Applicable  Percentage of each LC
Disbursement  made by the Issuing Bank and not reimbursed by the Borrower on the
date  due as  provided  in  Section  2.08(e),  or of any  reimbursement  payment
required to be refunded to the Borrower for any reason. Each Lender acknowledges
and agrees  that its  obligation  to  acquire  participations  pursuant  to this
Section  2.08(d) in respect of Letters of Credit is absolute  and  unconditional
and  shall  not  be  affected  by any  circumstance  whatsoever,  including  any
amendment,  renewal or extension of any Letter of Credit or the  occurrence  and
continuance  of a Default or reduction or termination  of the  Commitments,  and
that each such payment shall be made without any offset, abatement,  withholding
or reduction whatsoever.

               (e)  Reimbursement.  If  the  Issuing  Bank  shall  make  any  LC
                    -------------
Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such
LC Disbursement by paying to the Administrative Agent an amount equal to such LC
Disbursement  not later than 2:00 p.m.,  Charlotte,  North Carolina time, on the
date that such LC  Disbursement  is made,  if the Borrower  shall have  received
notice of such LC  Disbursement  prior to 2:00 p.m.,  Charlotte,  North Carolina
time,  on such date,  or, if such notice has not been  received by the  Borrower
prior to such time on such date, then not later than 12:00 noon Charlotte, North

                                       30

Carolina  time, on (i) the Business Day that the Borrower  receives such notice,
if such notice is received prior to 12:00 noon, Charlotte,  North Carolina time,
on the day of receipt,  or (ii) the Business Day  immediately  following  the day
that the Borrower  receives such notice, if such notice is not received prior to
such time on the day of receipt;  provided that if such LC  Disbursement  is not
less than  $1,000,000,  the Borrower may, subject to the conditions to Borrowing
set forth herein,  request in accordance  with Section 2.03 that such payment be
financed  with a ABR  Borrowing  in an  equivalent  amount and, to the extent so
financed, the Borrower's obligation to make such payment shall be discharged and
replaced by the resulting ABR  Borrowing.  If the Borrower  makes such a request
(and if the Borrower  fails to make such a request and has not made the relevant
reimbursement,   it  shall  be  deemed  to  have  made  such  a  request),   the
Administrative Agent shall notify each Lender of the applicable LC Disbursement,
the  payment  then due from the  Borrower in respect  thereof and such  Lender's
Applicable  Percentage thereof.  Promptly following receipt of such notice, each
Lender shall pay to the  Administrative  Agent its Applicable  Percentage of the
payment  then due from the  Borrower,  in the same manner as provided in Section
2.05 with  respect to Loans made by such Lender (and  Section  2.05 shall apply,
mutatis  mutandis,  to  the  payment  obligations  of  the  Lenders),   and  the
Administrative  Agent  shall  promptly  pay to the  Issuing  Bank the amounts so
received  by  it  from  the   Lenders.   Promptly   following   receipt  by  the
Administrative  Agent of any payment from the Borrower  pursuant to this Section
2.08(e),  the Administrative  Agent shall distribute such payment to the Issuing
Bank or, to the extent that Lenders have made payments  pursuant to this Section
2.08(e) to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank
as their interests may appear.

               (f) Obligations Absolute.  The Borrower's obligation to reimburse
                   --------------------
LC Disbursements as provided in Section 2.08(e) shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement under any and all  circumstances  whatsoever and  irrespective of
(i) any lack of validity or enforceability  of any Letter of Credit,  any Letter
of Credit Agreement or this Agreement, or any term or provision therein,(ii) any
draft or other document presented under a Letter of Credit proving to be forged,
fraudulent  or invalid in any respect or any  statement  therein being untrue or
inaccurate  in any  respect, (iii) payment by the Issuing Bank under a Letter of
Credit  against  presentation  of a draft or other document that does not comply
with the terms of such  Letter of Credit or any Letter of Credit  Agreement,  or
(iv)any other event or circumstance whatsoever, whether or not similar to any of
the  foregoing,  that might,  but for the  provisions  of this Section  2.08(f),
constitute  a legal or  equitable  discharge  of,  or  provide a right of setoff
against, the Borrower's obligations hereunder. Neither the Administrative Agent,
the Lenders nor the Issuing Bank,  nor any of their  Related  Parties shall have
any liability or  responsibility by reason of or in connection with the issuance
or  transfer  of any  Letter of Credit or any  payment  or  failure  to make any
payment thereunder  (irrespective of any of the circumstances referred to in the
preceding  sentence),  or any error,  omission,  interruption,  loss or delay in
transmission or delivery of any draft,  notice or other  communication  under or
relating  to any Letter of Credit  (including  any  document  required to make a
drawing  thereunder),  any error in  interpretation  of  technical  terms or any
consequence arising from causes beyond the control of the Issuing Bank; provided
that the  foregoing  shall not be  construed  to excuse  the  Issuing  Bank from
liability  to the  Borrower  to the extent of any direct  damages (as opposed to
consequential  damages,  claims in  respect  of which are  hereby  waived by the
Borrower to the extent  permitted by  applicable  law)  suffered by the Borrower
that are caused by the Issuing Bank's failure to exercise care when  determining
whether  drafts and other  documents  presented  under a Letter of Credit comply

                                       31

with the terms thereof.  The parties hereto expressly agree that, in the absence
of gross  negligence  or willful  misconduct on the part of the Issuing Bank (as
finally determined by a court of competent jurisdiction), the Issuing Bank shall
be deemed to have  exercised all requisite care in each such  determination.  In
furtherance of the foregoing and without  limiting the generality  thereof,  the
parties agree that,  with respect to documents  presented  which appear on their
face to be in substantial  compliance with the terms of a Letter of Credit,  the
Issuing Bank may, in its sole  discretion,  either  accept and make payment upon
such documents without responsibility for further  investigation,  regardless of
any notice or information to the contrary,  or refuse to accept and make payment
upon such  documents if such  documents  are not in strict  compliance  with the
terms of such Letter of Credit.

               (g)  Disbursement  Procedures.  The Issuing Bank shall,  promptly
                    ------------------------
following its receipt thereof,  examine all documents  purporting to represent a
demand for payment  under a Letter of Credit.  The Issuing  Bank shall  promptly
notify the  Administrative  Agent and the  Borrower by telephone  (confirmed  by
telecopy)  of such demand for  payment and whether the Issuing  Bank has made or
will make an LC  Disbursement  thereunder;  provided that any failure to give or
delay in giving such notice shall not relieve the Borrower of its  obligation to
reimburse  the  Issuing  Bank  and  the  Lenders  with  respect  to any  such LC
Disbursement.

               (h)  Interim  Interest.  If the  Issuing  Bank  shall make any LC
                    -----------------
Disbursement,  then,  until the Borrower shall have  reimbursed the Issuing Bank
for such LC Disbursement (either with its own funds or a Borrowing under Section
2.08(e)),  the unpaid amount thereof shall bear interest,  for each day from and
including the date such LC  Disbursement  is made to but excluding the date that
the  Borrower  reimburses  such LC  Disbursement,  at the  rate per  annum  then
applicable to ABR Loans. Interest accrued pursuant to this Section 2.08(h) shall
be for the account of the Issuing  Bank,  except  that  interest  accrued on and
after the date of payment by any Lender pursuant to Section 2.08(e) to reimburse
the  Issuing  Bank shall be for the account of such Lender to the extent of such
payment.

               (i)  Replacement  of the Issuing  Bank.  The Issuing  Bank may be
                    ---------------------------------
replaced at any time by written agreement among the Borrower, the Administrative
Agent,  the  replaced   Issuing  Bank  and  the  successor   Issuing  Bank.  The
Administrative  Agent shall  notify the Lenders of any such  replacement  of the
Issuing  Bank.  At the time any such  replacement  shall become  effective,  the
Borrower  shall pay all unpaid  fees  accrued  for the  account of the  replaced
Issuing Bank pursuant to Section  3.05(b).  From and after the effective date of
any such  replacement,  (i) the successor Issuing Bank shall have all the rights
and obligations of the Issuing Bank under this Agreement with respect to Letters
of Credit to be issued thereafter and (ii)references herein to the term "Issuing
Bank"  shall be deemed to refer to such  successor  or to any  previous  Issuing
Bank, or to such successor and all previous  Issuing Banks, as the context shall
require.  After the  replacement  of the Issuing  Bank  hereunder,  the replaced
Issuing  Bank shall  remain a party  hereto and shall  continue  to have all the
rights and  obligations of the Issuing Bank under this Agreement with respect to
Letters  of  Credit  issued  by it prior to such  replacement,  but shall not be
required to issue additional Letters of Credit.

               (j) Cash  Collateralization.  If (i) any  Event of Default  shall
                   -----------------------
occur and be continuing and the Borrower receives notice from the Administrative
Agent or the Majority Lenders demanding the deposit of cash collateral  pursuant
to this  Section  2.08(j),  or  (ii)  the  Borrower  is  required  to pay to the

                                       32

Administrative  Agent the excess  attributable  to an LC Exposure in  connection
with any  prepayment  pursuant  to  Section  3.04(c),  then the  Borrower  shall
deposit,  in an  account  with  the  Administrative  Agent,  in the  name of the
Administrative Agent and for the benefit of the Lenders, an amount in cash equal
to, in the case of an Event of Default,  the LC  Exposure,  and in the case of a
payment  required by Section  3.04(c),  the amount of such excess as provided in
Section 3.04(c),  as of such date plus any accrued and unpaid interest  thereon;
provided  that the  obligation  to deposit  such cash  collateral  shall  become
effective  immediately,  and  such  deposit  shall  become  immediately  due and
payable,  without demand or other notice of any kind, upon the occurrence of any
Event of  Default  with  respect  to the  Borrower  or any  Material  Subsidiary
described in Section 10.01(h) or Section 10.01(i). The Borrower hereby grants to
the  Administrative  Agent, for the benefit of the Issuing Bank and the Lenders,
an exclusive first priority and continuing  perfected  security  interest in and
Lien on such account and all cash, checks, drafts, certificates and instruments,
if any,  from time to time  deposited or held in such  account,  all deposits or
wire  transfers  made  thereto,  any and all  investments  purchased  with funds
deposited in such account, all interest, dividends, cash, instruments, financial
assets and other  Property from time to time  received,  receivable or otherwise
payable in respect of, or in exchange for, any or all of the foregoing,  and all
proceeds, products,  accessions,  rents, profits, income and benefits therefrom,
and any substitutions and replacements  therefor.  The Borrower's  obligation to
deposit  amounts  pursuant  to  this  Section  2.08(j)  shall  be  absolute  and
unconditional,  without regard to whether any  beneficiary of any such Letter of
Credit  has  attempted  to draw down all or a portion of such  amount  under the
terms of a Letter of Credit,  and, to the fullest extent permitted by applicable
law,  shall not be subject to any  defense or be affected by a right of set-off,
counterclaim or recoupment which the Borrower or any of its Subsidiaries may now
or  hereafter  have  against  any  such  beneficiary,   the  Issuing  Bank,  the
Administrative Agent, the Lenders or any other Person for any reason whatsoever.
Such deposit shall be held as collateral securing the payment and performance of
the  Borrower's  and the  Guarantor's  obligations  under this Agreement and the
other Loan Documents. The Administrative Agent shall have exclusive dominion and
control,  including the exclusive right of withdrawal,  over such account. Other
than any interest earned on the investment of such deposits,  which  investments
shall be made at the written  request and instruction of the Borrower but at the
option and sole  discretion of the  Administrative  Agent and at the  Borrower's
risk and expense, such deposits shall not bear interest. Interest or profits, if
any,  on such  investments  shall  accumulate  in such  account.  Moneys in such
account  shall be applied by the  Administrative  Agent to reimburse the Issuing
Bank for LC  Disbursements  for  which it has not been  reimbursed  and,  to the
extent not so applied,  shall be held for the satisfaction of the  reimbursement
obligations of the Borrower for the LC Exposure at such time or, if the maturity
of the Loans has been  accelerated,  be applied to satisfy other  obligations of
the  Borrower  and  the  Guarantors  under  this  Agreement  or the  other  Loan
Documents.  If the Borrower is required to provide an amount of cash  collateral
hereunder as a result of the occurrence of an Event of Default, and the Borrower
is  not  otherwise  required  to  pay to the  Administrative  Agent  the  excess
attributable  to an LC Exposure in connection  with any  prepayment  pursuant to
Section 3.04(c), then such amount (to the extent not applied as aforesaid) shall
be returned  to the  Borrower  within  three  Business  Days after all Events of
Default have been cured or waived.

                                  ARTICLE III
              Payments of Principal and Interest; Prepayments; Fees

                                       33

         Section 3.01 Repayment of Loans.  The Borrower  hereby  unconditionally
                      ------------------
promises to pay to the  Administrative  Agent for the account of each Lender the
then unpaid principal amount of each Loan on the Termination Date.

         Section 3.02 Interest.
                      --------

               (a) ABR Loans. The Loans comprising each ABR Borrowing shall bear
                   ---------
interest at the Alternate Base Rate plus the Applicable  Margin, but in no event
to exceed the Highest Lawful Rate.

               (b)  Eurodollar  Loans.  The  Loans  comprising  each  Eurodollar
                    -----------------
Borrowing  shall bear interest at the Adjusted LIBO Rate for the Interest Period
in effect for such  Borrowing  plus the  Applicable  Margin,  but in no event to
exceed the Highest Lawful Rate.

               (c)  Post-Default  Rate.  Notwithstanding  the foregoing,  if any
                    ------------------
principal of or interest on any Loan or any fee or other  amount  payable by the
Borrower or any Guarantor hereunder or under any other Loan Document is not paid
when due,  whether at stated  maturity,  upon  acceleration  or otherwise,  such
overdue amount shall bear interest,  after as well as before judgment, at a rate
per annum equal to two  percent  (2%) plus the rate  applicable  to ABR Loans as
provided in Section 3.02(a), but in no event to exceed the Highest Lawful Rate.

               (d) Interest  Payment Dates.  Accrued interest on each Loan shall
                   -----------------------
be payable in arrears  on each  Interest  Payment  Date for such Loan and on the
Termination Date; provided that (i) interest accrued pursuant to Section 3.02(c)
shall be payable on demand,  (ii) in the event of any repayment or prepayment of
any  Loan  (other  than an  optional  prepayment  of an ABR  Loan  prior  to the
Termination  Date),  accrued  interest on the principal amount repaid or prepaid
shall be payable on the date of such repayment or  prepayment,  and (iii) in the
event of any conversion of any  Eurodollar  Loan prior to the end of the current
Interest Period therefor,  accrued interest on such Loan shall be payable on the
effective date of such conversion.

               (e) Interest Rate  Computations.  All interest hereunder shall be
                   ---------------------------
computed  on the  basis of a year of 360 days,  unless  such  computation  would
exceed the Highest  Lawful Rate, in which case interest shall be computed on the
basis of a year of 365 days (or 366 days in a leap year),  except that  interest
computed by reference  to the  Alternate  Base Rate at times when the  Alternate
Base Rate is based on the Prime Rate shall be computed on the basis of a year of
365 days (or 366 days in a leap year), and in each case shall be payable for the
actual  number of days elapsed  (including  the first day but excluding the last
day). The applicable  Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall
be determined  by the  Administrative  Agent,  and such  determination  shall be
conclusive absent manifest error, and be binding upon the parties hereto.

         Section 3.03 Alternate Rate of Interest.  If prior to the  commencement
                      --------------------------
of any Interest Period for a Eurodollar Borrowing:

               (a) the  Administrative  Agent  determines  (which  determination
shall be conclusive absent manifest error) that adequate and reasonable means do
not  exist for  ascertaining  the  Adjusted  LIBO Rate or the LIBO Rate for such
Interest Period; or

                                       34

               (b) the  Administrative  Agent is advised by the Majority Lenders
that the  Adjusted  LIBO Rate or LIBO Rate,  as  applicable,  for such  Interest
Period will not adequately and fairly reflect the cost to such Lenders of making
or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative  Agent shall give notice thereof to the Borrower and the
Lenders by  telephone  or telecopy as promptly as  practicable  thereafter  and,
until the  Administrative  Agent  notifies the Borrower and the Lenders that the
circumstances  giving  rise to such  notice no longer  exist,  (i) any  Interest
Election   Request  that  requests  the  conversion  of  any  Borrowing  to,  or
continuation  of any Borrowing as, a Eurodollar  Borrowing shall be ineffective,
and  (ii)  if any  Borrowing  Request  requests  a  Eurodollar  Borrowing,  such
Borrowing shall be made as an ABR Borrowing.

         Section 3.04 Prepayments.
                      -----------

               (a) Optional  Prepayments.  The Borrower  shall have the right at
                   ---------------------
any time and from  time to time to  prepay  any  Borrowing  in whole or in part,
subject to prior notice in accordance with Section 3.04(b).

               (b) Notice and Terms of Optional  Prepayment.  The Borrower shall
                   ----------------------------------------
notify the  Administrative  Agent by  telephone  (confirmed  by telecopy) of any
prepayment  hereunder (i) in the case of  prepayment of a Eurodollar  Borrowing,
not later than 1:00 p.m.  Charlotte,  North Carolina  time,  three Business Days
before  the  date of  prepayment,  or (ii) in the case of  prepayment  of an ABR
Borrowing, not later than 1:00 p.m. Charlotte, North Carolina time, one Business
Day before the date of  prepayment.  Each such notice shall be  irrevocable  and
shall specify the prepayment date and the principal  amount of each Borrowing or
portion  thereof to be prepaid.  Promptly  following  receipt of any such notice
relating to a Borrowing,  the  Administrative  Agent shall advise the Lenders of
the contents  thereof.  Each partial  prepayment of any Borrowing shall be in an
amount that would be  permitted  in the case of an advance of a Borrowing of the
same Type as provided in Section 2.02.  Each  prepayment of a Borrowing shall be
applied  ratably to the Loans  included  in the prepaid  Borrowing.  Prepayments
shall be accompanied by accrued interest to the extent required by Section 3.02.

               (c) Mandatory Prepayments.
                   ---------------------

                    (i) If, after giving effect to any  termination or reduction
          of the Aggregate Commitment pursuant to Section 2.06(b), the Aggregate
          Revolving Credit Exposures exceeds the Aggregate Commitments, then the
          Borrower shall 119.  prepay the  Borrowings in an aggregate  principal
          amount equal to such excess, or add to the Mortgaged Property, Oil and
          Gas  Properties,  having value,  as  determined by the  Administrative
          Agent and the Majority Lenders,  equal to or greater than such excess,
          or a  combination  thereof  and  120.  if  any  excess  remains  after
          prepaying all of the Borrowings as a result of an LC Exposure,  pay to
          the  Administrative  Agent on behalf of the Lenders an amount equal to
          such  excess to be held as cash  collateral  as  provided  in  Section
          2.08(j).  The  Borrower  will be  obligated  to make such  prepayment,
          provide  such  collateral  and/or  deposit of cash  collateral  within
          ninety  (90) days  following  such  termination  or  reduction  of the
          Aggregate  Commitment;  provided that all payments required to be made

                                       35

          pursuant to this  Section  3.04(c)(i)  must be made on or prior to the
          Termination Date.

                    (ii) Upon any redetermination of or adjustment to the amount
          of the  Borrowing  Base in  accordance  with  Section  2.07 or Section
          8.13(c),  if the  Aggregate  Revolving  Credit  Exposures  exceeds the
          redetermined or adjusted  Borrowing Base, then the Borrower shall 122.
          prepay the Borrowings in an aggregate  principal  amount equal to such
          excess,  or add to the  Mortgaged  Property,  Oil and Gas  Properties,
          having  value,  as  determined  by the  Administrative  Agent  and the
          Majority  Lenders,  equal  to  or  greater  than  such  excess,  or  a
          combination thereof and 123. if any excess remains after prepaying all
          of  the  Borrowings  as a  result  of  an  LC  Exposure,  pay  to  the
          Administrative  Agent on behalf of the Lenders an amount equal to such
          excess to be held as cash  collateral as provided in Section  2.08(j).
          The Borrower shall be obligated to make such prepayment,  provide such
          collateral  and/or deposit of cash collateral  within ninety (90) days
          following its receipt of the New  Borrowing  Base Notice in accordance
          with Section 2.07(d) or the date the adjustment occurs;  provided that
          all payments required to be made pursuant to this Section  3.04(c)(ii)
          must be made on or prior to the Termination Date.

                    (iii) Upon any adjustments to the Borrowing Base pursuant to
          Section  9.12(a) or Section 9.13, if the  Aggregate  Revolving  Credit
          Exposures  exceeds the Borrowing  Base as adjusted,  then the Borrower
          shall 125.  prepay the  Borrowings  in an aggregate  principal  amount
          equal to such excess,  or add to the Mortgaged  Property,  Oil and Gas
          Properties,  having value, as determined by the  Administrative  Agent
          and the Majority  Lenders,  equal to or greater than such excess, or a
          combination thereof and 126. if any excess remains after prepaying all
          of  the  Borrowings  as a  result  of  an  LC  Exposure,  pay  to  the
          Administrative  Agent on behalf of the Lenders an amount equal to such
          excess to be held as cash  collateral as provided in Section  2.08(j).
          The Borrower shall be obligated to make such prepayment,  provide such
          collateral  and/or deposit of cash collateral  within ninety (90) days
          following such adjustment to the Borrowing Base (or, if sooner, on the
          date the Borrower  receives cash proceeds as a result of a disposition
          pursuant to Section 9.13);  provided that all payments  required to be
          made pursuant to this Section 3.04(c)(iii) must be made on or prior to
          the Termination Date.

                    (iv) Each prepayment of Borrowings  pursuant to this Section
          3.04(c) shall be applied,  first,  ratably to any ABR Borrowings  then
          outstanding,   and,   second,   to  any  Eurodollar   Borrowings  then
          outstanding,  and if  more  than  one  Eurodollar  Borrowing  is  then
          outstanding,  to each such  Eurodollar  Borrowing in order of priority
          beginning with the Eurodollar  Borrowing with the least number of days
          remaining in the Interest  Period  applicable  thereto and ending with
          the Eurodollar Borrowing with the most number of days remaining in the
          Interest Period applicable thereto.

                    (v) Each  prepayment of Borrowings  pursuant to this Section
          3.04(c) shall be applied  ratably to the Loans included in the prepaid
          Borrowings.  Prepayments  pursuant to this  Section  3.04(c)  shall be
          accompanied  by accrued  interest  to the extent  required  by Section
          3.02.

                                       36

               (d) No Premium or  Penalty.  Prepayments  permitted  or  required
                   ----------------------
under this Section 3.04 shall be without premium or penalty,  except as required
under Section 5.02.

         Section 3.05 Fees.
                      ----

               (a)  Commitment   Fees.  The  Borrower   agrees  to  pay  to  the
                    -----------------
Administrative  Agent for the account of each  Lender a  commitment  fee,  which
shall accrue at the applicable Commitment Fee Rate on the daily unused amount of
the  Commitment  of such Lender during the period from and including the date of
this Agreement to but excluding the Termination  Date.  Accrued  commitment fees
shall be  payable  in  arrears  on the last day of March,  June,  September  and
December of each year and on the Termination Date,  commencing on the first such
date to occur after the date hereof.  All  commitment  fees shall be computed on
the  basis of a year of 360 days,  unless  such  computation  would  exceed  the
Highest  Lawful Rate, in which case interest shall be computed on the basis of a
year of 365 days (or 366 days in a leap  year),  and  shall be  payable  for the
actual  number of days elapsed  (including  the first day but excluding the last
day).

               (b) Letter of Credit Fees. The Borrower  agrees to pay (i) to the
                   ---------------------
Administrative  Agent for the  account of each Lender a  participation  fee with
respect to its  participations  in Letters of Credit,  which shall accrue at the
same  Applicable  Margin used to  determine  the  interest  rate  applicable  to
Eurodollar  Loans on the  average  daily  amount of such  Lender's  LC  Exposure
(excluding any portion thereof  attributable  to unreimbursed LC  Disbursements)
during the period from and including the date of this Agreement to but excluding
the later of the date on which such Lender's Commitment  terminates and the date
on which such Lender ceases to have any LC Exposure,  (ii) to the Issuing Bank a
fronting fee,  which shall accrue at the rate of 0.125% per annum on the average
daily amount of the LC Exposure  (excluding any portion thereof  attributable to
unreimbursed LC Disbursements)  during the period from and including the date of
this  Agreement to but  excluding  the later of the date of  termination  of the
Commitments  and the date on which there ceases to be any LC Exposure,  provided
that in no event shall such fee be less than $300 during any quarter,  and (iii)
to the Issuing Bank, for its own account,  its standard fees with respect to the
issuance,  amendment, renewal or extension of any Letter of Credit or processing
of drawings thereunder. Participation fees and fronting fees accrued through and
including the last day of March, June, September and December of each year shall
be payable on the third Business Day following such last day,  commencing on the
first such date to occur  after the date of this  Agreement;  provided  that all
such fees shall be payable on the  Termination  Date and any such fees  accruing
after the Termination Date shall be payable on demand. Any other fees payable to
the Issuing Bank  pursuant to this Section  3.05(b)  shall be payable  within 10
days after demand. All participation fees and fronting fees shall be computed on
the  basis of a year of 360 days,  unless  such  computation  would  exceed  the
Highest  Lawful Rate, in which case interest shall be computed on the basis of a
year of 365 days (or 366 days in a leap  year),  and  shall be  payable  for the
actual  number of days elapsed  (including  the first day but excluding the last
day).

               (c) Administrative  Agent Fees. The Borrower agrees to pay to the
                   --------------------------
Administrative  Agent,  for its own account,  fees payable in the amounts and at
the times  separately  agreed upon between the  Borrower and the  Administrative
Agent.

                                       37

                                   ARTICLE IV
               Payments; Pro Rata Treatment; Sharing of Set-offs.

         Section  4.01  Payments  Generally;  Pro  Rata  Treatment;  Sharing  of
                        --------------------------------------------------------
Set-offs.
- --------

               (a)  Payments  by the  Borrower.  The  Borrower  shall  make each
                    --------------------------
payment  required to be made by it hereunder  (whether of  principal,  interest,
fees or reimbursement of LC  Disbursements,  or of amounts payable under Section
5.01,  Section 5.02,  Section 5.03 or otherwise)  prior to 1:00 p.m.  Charlotte,
North  Carolina  time,  on the date when due, in  immediately  available  funds,
without defense,  deduction,  recoupment,  set-off or  counterclaim.  Fees, once
paid,  shall not be refundable  under any  circumstances.  Any amounts  received
after such time on any date may, in the discretion of the Administrative  Agent,
be deemed to have been received on the next succeeding Business Day for purposes
of  calculating  interest  thereon.  All  such  payments  shall  be  made to the
Administrative  Agent at its offices specified in Section 12.01, except payments
to be made directly to the Issuing Bank as expressly  provided herein and except
that payments pursuant to Section 5.01,  Section 5.02,  Section 5.03 and Section
12.03 shall be made directly to the Persons entitled thereto. The Administrative
Agent shall  distribute any such payments  received by it for the account of any
other Person to the appropriate recipient promptly following receipt thereof. If
any payment hereunder shall be due on a day that is not a Business Day, the date
for payment shall be extended to the next  succeeding  Business Day, and, in the
case of any payment accruing interest, interest thereon shall be payable for the
period of such extension. All payments hereunder shall be made in dollars.

               (b)  Application  of  Insufficient   Payments.  If  at  any  time
                    ----------------------------------------
insufficient funds are received by and available to the Administrative  Agent to
pay fully all amounts of principal, unreimbursed LC Disbursements,  interest and
fees then due hereunder,  such funds shall be applied (i) first, towards payment
of interest  and fees then due  hereunder,  ratably  among the parties  entitled
thereto in  accordance  with the amounts of  interest  and fees then due to such
parties,  and (ii) second,  towards  payment of principal  and  unreimbursed  LC
Disbursements then due hereunder,  ratably among the parties entitled thereto in
accordance with the amounts of principal and unreimbursed LC Disbursements  then
due to such parties.

               (c)  Sharing of  Payments by  Lenders.  If any Lender  shall,  by
                    --------------------------------
exercising any right of set-off or counterclaim or otherwise,  obtain payment in
respect of any principal of or interest on any of its Loans or participations in
LC  Disbursements  resulting  in such  Lender  receiving  payment  of a  greater
proportion  of the  aggregate  amount  of its  Loans  and  participations  in LC
Disbursements  and accrued interest thereon than the proportion  received by any
other Lender,  then the Lender receiving such greater  proportion shall purchase
(for cash at face value)  participations  in the Loans and  participations in LC
Disbursements  of other  Lenders to the extent  necessary so that the benefit of
all such payments shall be shared by the Lenders  ratably in accordance with the
aggregate  amount of principal of and accrued interest on their respective Loans
and  participations  in  LC  Disbursements;   provided  that  (i)  if  any  such
participations  are purchased and all or any portion of the payment  giving rise
thereto is recovered,  such  participations  shall be rescinded and the purchase
price restored to the extent of such recovery,  without  interest,  and (ii) the
provisions  of this  Section  4.01(c)  shall  not be  construed  to apply to any
payment  made by the  Borrower  pursuant to and in  accordance  with the express
terms of this Agreement or any payment obtained by a Lender as consideration for
the  assignment  of  or  sale  of  a  participation  in  any  of  its  Loans  or

                                       38

participations in LC Disbursements to any assignee or participant, other than to
the Borrower or any Subsidiary or Affiliate  thereof (as to which the provisions
of this Section 4.01(c) shall apply). The Borrower consents to the foregoing and
agrees,  to the extent it may  effectively do so under  applicable law, that any
Lender  acquiring a  participation  pursuant to the foregoing  arrangements  may
exercise against the Borrower rights of set-off and counterclaim with respect to
such  participation  as fully as if such  Lender  were a direct  creditor of the
Borrower in the amount of such participation.

         Section  4.02  Presumption  of  Payment  by the  Borrower.  Unless  the
                        ------------------------------------------
Administrative  Agent shall have received  notice from the Borrower prior to the
date on which any payment is due to the Administrative  Agent for the account of
the Lenders or the Issuing  Bank that the Borrower  will not make such  payment,
the  Administrative  Agent may assume that the Borrower has made such payment on
such date in  accordance  herewith  and may, in reliance  upon such  assumption,
distribute  to the Lenders or the Issuing  Bank,  as the case may be, the amount
due. In such event, if the Borrower has not in fact made such payment, then each
of the  Lenders or the Issuing  Bank,  as the case may be,  severally  agrees to
repay to the Administrative  Agent forthwith on demand the amount so distributed
to such  Lender or Issuing  Bank with  interest  thereon,  for each day from and
including the date such amount is distributed to it to but excluding the date of
payment  to the  Administrative  Agent,  at the  greater  of the  Federal  Funds
Effective Rate and a rate determined by the  Administrative  Agent in accordance
with banking industry rules on interbank compensation.

         Section 4.03 Certain  Deductions by the  Administrative  Agent.  If any
                      -------------------------------------------------
Lender  shall fail to make any  payment  required  to be made by it  pursuant to
Section  2.05(b),  Section  2.08(d),  Section  2.08(e) or Section  4.02 then the
Administrative  Agent  may,  in its  discretion  (notwithstanding  any  contrary
provision hereof),  apply any amounts thereafter  received by the Administrative
Agent for the account of such Lender to satisfy such Lender's  obligations under
such Sections until all such unsatisfied obligations are fully paid.

         Section 4.04 Disposition of Proceeds.  The Security Instruments contain
                      -----------------------
an assignment by the Borrower and/or the Material Subsidiaries unto and in favor
of the  Administrative  Agent  for  the  benefit  of the  Lenders  of all of the
Borrower's or each Material  Subsidiary's  interest in and to production and all
proceeds  attributable  thereto  which may be produced  from or allocated to the
Mortgaged Property.  The Security Instruments further provide in general for the
application of such proceeds to the  satisfaction of the  Indebtedness and other
obligations   described  therein  and  secured  thereby.   Notwithstanding   the
assignment  contained in such Security  Instruments,  until the occurrence of an
Event of Default,  (a) the Administrative  Agent and the Lenders agree that they
will neither notify the purchaser or purchasers of such  production nor take any
other action to cause such proceeds to be remitted to the  Administrative  Agent
or the Lenders,  but the Lenders will instead permit such proceeds to be paid to
the Borrower and its Material Subsidiarie and (b) the Lenders hereby authorize
the Administrative  Agent to take such actions as may be necessary to cause such
proceeds to be paid to the Borrower and/or such Material Subsidiaries.

                                       39

                                   ARTICLE V
           Increased Costs; Break Funding Payments; Taxes; Illegality

         Section 5.01 Increased Costs.
                      ---------------

               (a) Eurodollar Changes in Law. If any Change in Law shall:
                   -------------------------

                    (i) impose,  modify or deem applicable any reserve,  special
          deposit or similar requirement against assets of, deposits with or for
          the account  of, or credit  extended  by, any Lender  (except any such
          reserve requirement reflected in the Adjusted LIBO Rate); or

                    (ii) impose on any Lender or the London interbank market any
          other condition  affecting this Agreement or Eurodollar  Loans made by
          such Lender;

and the result of any of the  foregoing  shall be to  increase  the cost to such
Lender of making or  maintaining  any  Eurodollar  Loan (or of  maintaining  its
obligation to make any such Loan) or to reduce the amount of any sum received or
receivable by such Lender  (whether of principal,  interest or otherwise),  then
the Borrower will pay to such Lender such  additional  amount or amounts as will
compensate such Lender for such additional costs incurred or reduction suffered.

               (b)  Capital  Requirements.  If any  Lender or the  Issuing  Bank
                    ---------------------
determines that any Change in Law regarding  capital  requirements  has or would
have the effect of reducing  the rate of return on such  Lender's or the Issuing
Bank's  capital or on the capital of such Lender's or the Issuing Bank's holding
company,  if any, as a  consequence  of this  Agreement or the Loans made by, or
participations  in Letters of Credit  held by,  such  Lender,  or the Letters of
Credit  issued by the Issuing  Bank,  to a level below that which such Lender or
the Issuing Bank or such Lender's or the Issuing  Bank's  holding  company could
have  achieved  but for such  Change  in Law  (taking  into  consideration  such
Lender's or the Issuing Bank's policies and the policies of such Lender's or the
Issuing Bank's holding company with respect to capital adequacy), then from time
to time the Borrower  will pay to such Lender or the Issuing  Bank,  as the case
may be, such additional  amount or amounts as will compensate such Lender or the
Issuing Bank or such Lender's or the Issuing Bank's holding company for any such
reduction suffered.

               (c)  Certificates.  A certificate of a Lender or the Issuing Bank
                    ------------
setting forth the amount or amounts  necessary to compensate  such Lender or the
Issuing Bank or its holding company, as the case may be, as specified in Section
5.01(a) or (b) shall be delivered to the Borrower and shall be conclusive absent
manifest  error.  The Borrower shall pay such Lender or the Issuing Bank, as the
case may be,  the  amount  shown as due on any such  certificate  within 10 days
after receipt thereof.

               (d)  Effect  of  Failure  or  Delay in  Requesting  Compensation.
                    -----------------------------------------------------------
Failure  or  delay on the  part of any  Lender  or the  Issuing  Bank to  demand
compensation pursuant to this Section 5.01 shall not constitute a waiver of such
Lender's or the Issuing Bank's right to demand such compensation.

         Section 5.02 Break Funding Payments. In the event of (a) the payment of
                      ----------------------
any principal of any  Eurodollar  Loan other than on the last day of an Interest
Period applicable  thereto  (including as a result of an Event of Default),  (b)
the  conversion of any  Eurodollar  Loan into an ABR Loan other than on the last
day of the Interest  Period  applicable  thereto,  or (c) the failure to borrow,

                                       40

convert,  continue or prepay any  Eurodollar  Loan on the date  specified in any
notice delivered  pursuant  hereto,  then, in any such event, the Borrower shall
compensate  each  Lender for the loss,  cost and  expense  attributable  to such
event.  In the case of a  Eurodollar  Loan,  such  loss,  cost or expense to any
Lender shall be deemed to include an amount  determined by such Lender to be the
excess,  if any, of (i) the amount of interest  which would have  accrued on the
principal amount of such Loan had such event not occurred,  at the Adjusted LIBO
Rate that would have been  applicable to such Loan, for the period from the date
of such event to the last day of the then current  Interest Period therefor (or,
in the case of a failure to borrow,  convert or  continue,  for the period  that
would  have been the  Interest  Period for such  Loan),  over (ii) the amount of
interest  which  would  accrue on such  principal  amount for such period at the
interest rate which such Lender would bid were it to bid, at the commencement of
such period,  for dollar  deposits of a comparable  amount and period from other
banks in the eurodollar market.

A certificate of any Lender setting forth any amount or amounts that such Lender
is entitled to receive  pursuant to this  Section 5.02 shall be delivered to the
Borrower and shall be conclusive  absent manifest error.  The Borrower shall pay
such Lender the amount shown as due on any such certificate within 10 days after
receipt thereof.

         Section 5.03 Taxes.
                      -----

               (a) Payments Free of Taxes. Any and all payments by or on account
                   ----------------------
of any  obligation  of the  Borrower or any Material  Subsidiary  under any Loan
Document  shall  be  made  free  and  clear  of and  without  deduction  for any
Indemnified  Taxes  or  Other  Taxes;  provided  that if the  Borrower  shall be
required to deduct any Indemnified Taxes or Other Taxes from such payments, then
(i) the sum payable  shall be  increased  as  necessary so that after making all
required deductions  (including deductions applicable to additional sums payable
under this Section 5.03(a)),  the Administrative  Agent,  Lender or Issuing Bank
(as the case may be) receives an amount equal to the sum it would have  received
had no such  deductions  been made, (ii) the Borrower shall make such deductions
and (iii)  the  Borrower  shall pay the full  amount  deducted  to the  relevant
Governmental Authority in accordance with applicable law.

               (b) Payment of Other Taxes by the  Borrower.  The Borrower  shall
                   ---------------------------------------
pay any Other Taxes to the relevant  Governmental  Authority in accordance  with
applicable law.

               (c) Indemnification by the Borrower. The Borrower shall indemnify
                   -------------------------------
the Administrative Agent, each Lender and the Issuing Bank, within 10 days after
written demand therefor,  for the full amount of any Indemnified  Taxes or Other
Taxes paid by the Administrative  Agent, such Lender or the Issuing Bank, as the
case  may  be,  on or  with  respect  to any  payment  by or on  account  of any
obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes
imposed or asserted on or  attributable  to amounts  payable  under this Section
5.03) and any penalties,  interest and reasonable  expenses arising therefrom or
with respect thereto,  whether or not such Indemnified Taxes or Other Taxes were
correctly or legally imposed or asserted by the relevant Governmental Authority.
A certificate  of the  Administrative  Agent, a Lender or the Issuing Bank as to
the  amount of such  payment  or  liability  under  this  Section  5.03 shall be
delivered to the Borrower and shall be conclusive absent manifest error.

                                       41

               (d)  Evidence  of  Payments.  As soon as  practicable  after  any
                    ----------------------
payment of  Indemnified  Taxes or Other Taxes by the Borrower to a  Governmental
Authority,  the Borrower shall deliver to the Administrative  Agent the original
or  a  certified  copy  of a  receipt  issued  by  such  Governmental  Authority
evidencing  such payment,  a copy of the return  reporting such payment or other
evidence of such payment reasonably satisfactory to the Administrative Agent.

               (e) Foreign  Lenders.  Any Foreign  Lender that is entitled to an
                   ----------------
exemption from or reduction of withholding tax under the law of the jurisdiction
in which the Borrower is located,  or any treaty to which such jurisdiction is a
party,  with respect to payments under this Agreement or any other Loan Document
shall deliver to the Borrower (with a copy to the Administrative  Agent), at the
time or times prescribed by applicable law, such properly completed and executed
documentation  prescribed  by  applicable  law or  reasonably  requested  by the
Borrower as will permit such  payments to be made  without  withholding  or at a
reduced rate.

               (f)  Tax  Refunds.  If  the  Administrative  Agent  or  a  Lender+
                    ------------
determines,  in its reasonable discretion,  that it has received a refund of any
Taxes or Other Taxes as to which it has been indemnified by the Borrower or with
respect to which the  Borrower  has paid  additional  amounts  pursuant  to this
Section  5.03,  it shall pay over such refund to the  Borrower  (but only to the
extent of indemnity  payments made, or additional  amounts paid, by the Borrower
under this  Section 5.03 with respect to the Taxes or Other Taxes giving rise to
such refund),  net of all out-of-pocket  expenses of the Administrative Agent or
such Lender and without  interest  (other than any interest paid by the relevant
Governmental  Authority  with  respect  to  such  refund);  provided,  that  the
Borrower, upon the request of the Administrative Agent or such Lender, agrees to
repay the amount  paid over to the  Borrower  (plus any  penalties,  interest or
other  charges   imposed  by  the  relevant   Governmental   Authority)  to  the
Administrative  Agent or such  Lender in the event the  Administrative  Agent or
such Lender is required  to repay such  refund to such  Governmental  Authority.
This Section 5.03 shall not be construed to require the Administrative  Agent or
any Lender to make available its tax returns (or any other information  relating
to its taxes which it deems confidential) to the Borrower or any other Person.

         Section 5.04  Designation of Different  Lending  Office.  If any Lender
                       -----------------------------------------
requests  compensation under Section 5.01, or if the Borrower is required to pay
any  additional  amount to any  Lender  or any  Governmental  Authority  for the
account of any Lender  pursuant  to Section  5.03,  then such  Lender  shall use
reasonable  efforts to  designate  a  different  lending  office for  funding or
booking its Loans hereunder or to assign its rights and obligations hereunder to
another of its  offices,  branches or  affiliates,  if, in the  judgment of such
Lender,  such  designation or assignment  (i) would  eliminate or reduce amounts
payable  pursuant to Section  5.01 or Section  5.03,  as the case may be, in the
future  and (ii)  would not  subject  such  Lender to any  unreimbursed  cost or
expense and would not otherwise be  disadvantageous to such Lender. The Borrower
hereby agrees to pay all reasonable costs and expenses incurred by any Lender in
connection with any such designation or assignment.

         Section 5.05  Illegality.  Notwithstanding  any other provision of this
                       ----------
Agreement,  in the  event  that  it  becomes  unlawful  for  any  Lender  or its
applicable lending office to honor its obligation to make or maintain Eurodollar
Loans either generally or having a particular  Interest Period  hereunder,  then
(a) such Lender shall promptly  notify the Borrower and the Administrative Agent
thereof and such  Lender's  obligation  to make such  Eurodollar  Loans shall be

                                       42

suspended (the  "Affected  Loans") until such time as such Lender may again make
                 ---------------
and  maintain  such  Eurodollar  Loans and (b)  all  Affected  Loans which would
otherwise  be made by such Lender  shall be made  instead as ABR Loans (and,  if
such Lender so requests by notice to the Borrower and the Administrative  Agent,
all  Affected  Loans of such  Lender  then  outstanding  shall be  automatically
converted  into ABR Loans on the date  specified  by such Lender in such notice)
and, to the extent that Affected  Loans are so made as (or  converted  into) ABR
Loans,  all  payments  of  principal  which would  otherwise  be applied to such
Lender's Affected Loans shall be applied instead to its ABR Loans.

                                   ARTICLE VI
                              Conditions Precedent

         Section 6.01  Effective  Date.  The  obligations of the Lenders to make
                       ---------------
Loans and of the Issuing  Bank to issue  Letters of Credit  hereunder  shall not
become  effective  until the date on which each of the  following  conditions is
satisfied (or waived in accordance with Section 12.02):

               (a) The  Administrative  Agent shall have  received  all fees and
other  amounts due and  payable on or prior to the  Effective  Date,  including,
without limitation,  to the extent invoiced,  reimbursement or payment of all of
the Administrative Agent's out-of-pocket expenses including, without limitation,
the reasonable fees, charges and disbursements of counsel for the Administrative
Agent, required to be reimbursed or paid by the Borrower hereunder.

               (b) The Administrative Agent shall have received a certificate of
the  Secretary  or an  Assistant  Secretary  of each of the  Borrower  and  each
Guarantor setting forth 168.  resolutions of its board of directors with respect
to the  authorization  of the Borrower or such  Guarantor to execute and deliver
the Loan  Documents  to which it is a party and to enter  into the  transactions
contemplated  in those  documents,  169.  the  officers of the  Borrower or such
Guarantor  (y) who are  authorized  to sign the  Loan  Documents  to  which  the
Borrower  or such  Guarantor  is a party and (z) who  will,  until  replaced  by
another  officer  or  officers  duly  authorized  for that  purpose,  act as its
representative  for the  purposes of signing  documents  and giving  notices and
other  communications  in connection  with this  Agreement and the  transactions
contemplated hereby, 170. specimen signatures of such authorized  officers,  and
171. the articles or certificate of incorporation and bylaws of the Borrower and
such Guarantor,  certified as being true and complete.  The Administrative Agent
and  the  Lenders  may  conclusively   rely  on  such   certificate   until  the
Administrative  Agent  receives  notice  in  writing  from the  Borrower  to the
contrary.

               (c) The Administrative Agent shall have received  certificates of
the appropriate State agencies with respect to the existence,  qualification and
good standing of the Borrower and each Guarantor.

               (d) The  Administrative  Agent shall have  received a  compliance
certificate  which  shall be  substantially  in the form of  Exhibit B, duly and
properly executed by a Responsible Officer and dated as of the date of Effective
Date.

               (e) The Administrative  Agent shall have received from each party
thereto  duly  executed  and  completed  counterparts  (in such number as may be
requested by the Administrative Agent) of each of the Assignments, together with
the original  promissory  notes  assigned  thereby  endorsed to the order of the

                                       43

Administrative Agent and the original recorded  acknowledgment copies of each of
the other instruments and documents described on Exhibit A to the Assignments.

               (f) The Administrative  Agent shall have received from each party
hereto  counterparts  (in such number as may be requested by the  Administrative
Agent) of this Agreement signed on behalf of such party.

               (g) The  Administrative  Agent shall have  received duly executed
Notes  payable to the order of each  Lender in a principal  amount  equal to its
Commitment dated as of the date hereof.

               (h) The Administrative  Agent shall have received from each party
thereto  duly  executed  and  completed  counterparts  (in such number as may be
requested by the Administrative  Agent) of the Security  Instruments,  including
the Pledge, the Guaranty Agreement and the other Security Instruments  described
on Exhibit D-1. In  connection  with the  execution and delivery of the Security
Instruments, the Administrative Agent shall:

                    (i) be reasonably  satisfied  that the Security  Instruments
          create first priority, perfected Liens (subject only to Excepted Liens
          identified  in clauses (a) to (d) and (f) of the  definition  thereof,
          but subject to the provisos at the end of such definition) on at least
          75% of the total value of the Oil and Gas Properties  evaluated in the
          Initial  Reserve Report  sufficient in the  reasonable  opinion of the
          Administrative  Agent to justify a Borrowing Base of  $175,000,000  on
          the Effective Date hereof; and

                    (ii) have  received  certificates,  together  with  undated,
          blank stock powers for each such certificate,  representing all of the
          issued and outstanding Equity Interests of each of the Guarantors.

               (i) The  Administrative  Agent shall have  received an opinion of
Ballard Spahr Andrews & Ingersoll,  LLP, special counsel to the Borrower and
the Guarantors, substantially in the form of Exhibit C hereto.

               (j) The Administrative Agent shall have received a certificate of
insurance  coverage of the  Borrower  evidencing  that the  Borrower is carrying
insurance in accordance with Section 7.13.

               (k) The  Administrative  Agent shall have received  copies of the
title information  recently prepared by Thompson & Knight L.L.P. for Bank of
America,  N.A., in form and substance  satisfactory to the Administrative Agent,
setting  forth the status of title to at least 75% of the total value of the Oil
and  Gas   Properties   evaluated  in  the  Initial   Reserve   Report  and  the
Administrative  Agent  shall be  reasonably  satisfied  with the status of title
reflected therein.

               (l) The Administrative  Agent shall be reasonably  satisfied with
the  environmental  condition of the Oil and Gas  Properties of the Borrower and
its Material Subsidiaries.

                                       44

               (m) The Administrative Agent shall have received a certificate of
a Responsible  Officer of the Borrower certifying that the Borrower has received
all consents and approvals required by Section 7.03.

               (n) The  Administrative  Agent shall have  received the financial
statements  referred  to in  Section  7.04(a)  and the  Initial  Reserve  Report
accompanied by a certificate covering the matters described in Section 8.12(c).

               (o) The Administrative  Agent shall have received appropriate UCC
search  certificates  reflecting no prior Liens  encumbering  the Properties the
Borrower and the Material Subsidiaries for each of the following  jurisdictions:
Colorado,  Delaware,  Louisiana,  Montana, New Mexico,  North Dakota,  Oklahoma,
Texas,  Utah,  and  Wyoming  and  any  other   jurisdiction   requested  by  the
Administrative AGENT; other than those being assigned or released on or prior to
the Effective Date or Liens permitted by Section 9.03.

               (p) The  Administrative  Agent  shall  have  received  such other
documents as the  Administrative  Agent or special counsel to the Administrative
Agent may reasonably request.

         The  Administrative  Agent shall notify the Borrower and the Lenders of
the  Effective   Date,   and  such  notice  shall  be  conclusive  and  binding.
Notwithstanding the foregoing,  the obligations of the Lenders to make Loans and
of the  Issuing  Bank to issue  Letters  of Credit  hereunder  shall not  become
effective  unless  each of the  foregoing  conditions  is  satisfied  (or waived
pursuant to Section 12.02) at or prior to 3:00 p.m.,  Charlotte,  North Carolina
time,  on  January  31,  2003  (and,  in the event  such  conditions  are not so
satisfied or waived, the Commitments shall terminate at such time).

         Section 6.02 Each Credit Event. The obligation of each Lender to make a
                      -----------------
Loan on the occasion of any Borrowing  (including the initial  funding),  and of
the  Issuing  Bank to issue,  amend,  renew or extend any  Letter of Credit,  is
subject to the satisfaction of the following conditions:

               (a) At the time of and  immediately  after giving  effect to such
Borrowing  or the  issuance,  amendment,  renewal or extension of such Letter of
Credit, as applicable, no Default shall have occurred and be continuing.

               (b) At the time of and  immediately  after giving  effect to such
Borrowing  or the  issuance,  amendment,  renewal or extension of such Letter of
Credit, as applicable, no Material Adverse Effect shall have occurred.

               (c) The  representations  and  warranties of the Borrower and the
Guarantors set forth in this Agreement and in the other Loan Documents  shall be
true  and  correct  in all  material  respects  on and as of the  date  of  such
Borrowing  or the date of  issuance,  amendment,  renewal or  extension  of such
Letter of Credit, as applicable,  except to the extent any such  representations
and warranties  are expressly  limited to an earlier date, in which case, on and
as of the date of such Borrowing or the date of issuance,  amendment, renewal or
extension of such Letter of Credit,  as  applicable,  such  representations  and
warranties  shall continue to be true and correct as of such  specified  earlier
date.

                                       45

               (d) The making of such Loan or the issuance,  amendment,  renewal
or extension of such Letter of Credit,  as applicable,  would not conflict with,
or cause any Lender or the  Issuing  Bank to violate or exceed,  any  applicable
Governmental  Requirement,  and no  Change in Law shall  have  occurred,  and no
litigation  shall be pending or  threatened,  which does or, with respect to any
threatened  litigation,  seeks to, enjoin,  prohibit or restrain,  the making or
repayment of any Loan, the issuance,  amendment, renewal, extension or repayment
of any Letter of Credit or any participations therein or the consummation of the
transactions contemplated by this Agreement or any other Loan Document.

               (e)  The  receipt  by the  Administrative  Agent  of a  Borrowing
Request in  accordance  with Section 2.03 or a request for a Letter of Credit in
accordance with Section 2.08(b), as applicable.

         Each Borrowing and each issuance, amendment, renewal or extension of
any Letter of Credit shall be deemed to constitute a representation and warranty
by the Borrower on the date thereof as to the matters specified in Section
6.02(a) through (e).

         Section 6.03 Further Conditions on Borrowing Base Increases.
                      ----------------------------------------------

               (a) Prior to the increase of the Borrowing Base from $175,000,000
to  $215,000,000,   the  Administrative   Agent  shall  have  received  evidence
satisfactory to the Administrative  Agent that Security  Instruments  reasonably
satisfactory  to  the  Administrative  Agent  have  been  properly  recorded  on
Properties  sufficient in the reasonable opinion of the Administrative  Agent to
justify a Borrowing Base of $215,000,000.

               (b) Prior to the increase of the Borrowing Base from $215,000,000
to  $250,000,000,   the  Administrative   Agent  shall  have  received  evidence
satisfactory to the Administrative  Agent that Security  Instruments  reasonably
satisfactory  to  the  Administrative  Agent  have  been  properly  recorded  on
Properties  sufficient in the reasonable opinion of the Administrative  Agent to
justify a Borrowing Base of $250,000,000.

                                   ARTICLE VII
                         Representations and Warranties

         The Borrower represents and warrants to the Lenders that:

         Section  7.01  Organization;  Powers.  Each  of the  Borrower  and  the
                        ---------------------
Material  Subsidiaries is duly organized,  validly existing and in good standing
under the laws of the jurisdiction of its organization,  has all requisite power
and  authority,  and has all  material  governmental  licenses,  authorizations,
consents and approvals necessary, to own its assets and to carry on its business
as now  conducted,  and is qualified to do business in, and is in good  standing
in,  every  jurisdiction  where such  qualification  is  required,  except where
failure  to have such  power,  authority,  licenses,  authorizations,  consents,
approvals and qualifications could not reasonably be expected to have a Material
Adverse Effect.

         Section 7.02 Authority; Enforceability. The Transactions are within the
                      -------------------------
Borrower's and each  Guarantor's  corporate powers and have been duly authorized
by all  necessary  corporate  and, if required,  stockholder  action.  Each Loan
Document  to which  the  Borrower  and each  Guarantor  is a party has been duly

                                       46

executed and  delivered by the Borrower and such  Guarantor  and  constitutes  a
legal,  valid and binding  obligation  of the  Borrower and such  Guarantor,  as
applicable,  enforceable  in  accordance  with its terms,  subject to applicable
bankruptcy,  insolvency,  reorganization,  moratorium  or other  laws  affecting
creditors'  rights  generally  and  subject  to  general  principles  of equity,
regardless of whether considered in a proceeding in equity or at law.

         Section 7.03  Approvals;  No Conflicts.  The  Transactions  (a) do  not
                       ------------------------
require any consent or approval of,  registration  or filing with,  or any other
action by, any Governmental Authority or any other third Person, nor is any such
consent,  approval,  registration,  filing  or other  action  necessary  for the
validity  or  enforceability  of any Loan  Document or the  consummation  of the
transactions contemplated thereby, except such as have been obtained or made and
are in full force and effect  other than (i).  the  recording  and filing of the
Security  Instruments  as required by this Agreement and (ii). those third party
approvals or consents which, if not made or obtained,  would not cause a Default
hereunder, could not reasonably be expected to have a Material Adverse Effect or
do not have an adverse effect on the enforceability of the Loan Documents,  (b).
will not violate any  applicable  law or regulation  or the charter,  by-laws or
other organizational documents of the Borrower or any Material Subsidiary or any
order of any  Governmental  Authority,  (c).  will not  violate  or  result in a
default  under any  indenture,  agreement or other  instrument  binding upon the
Borrower or any Material  Subsidiary or its Properties,  or give rise to a right
thereunder  to require any payment to be made by the  Borrower or such  Material
Subsidiary and (d). will not result in the creation or imposition of any Lien on
any Property of the Borrower or any  Material  Subsidiary  (other than the Liens
created by the Loan Documents).

         Section 7.04 Financial Condition; No Material Adverse Change.
                      -----------------------------------------------

               (a) The  Borrower  has  heretofore  furnished  to the Lenders its
consolidated  balance sheet and  statements of income,  stockholders  equity and
cash flows (i). as of and for the fiscal year ended December 31, 2001,  reported
on by Arthur Andersen LLP,  independent public  accountants,  and (ii) as of and
for the fiscal  quarter and the portion of the fiscal year ended  September  30,
2002,  certified  by its chief  financial  officer.  Such  financial  statements
present fairly, in all material respects,  the financial position and results of
operations and cash flows of the Borrower and its  Consolidated  Subsidiaries as
of such dates and for such periods in accordance with GAAP,  subject to year-end
audit  adjustments  and the absence of  footnotes  in the case of the  unaudited
quarterly financial statements.

               (b) Since  December  31,  2001,  (i)  there has  been no material
adverse  change in the  business,  assets,  operations,  prospects or condition,
financial or otherwise, of the Borrower and its Material Subsidiaries,  taken as
a whole and (ii) the business of the Borrower and its Material  Subsidiaries has
been  conducted  only in the  ordinary  course  consistent  with  past  business
practices.

               (c) Neither the Borrower nor any Material  Subsidiary  has on the
date hereof (i) any  material  Debt  (including  Disqualified  Capital  Stock) ,
except as referred to or reflected or provided for in the Financial  Statements,
or  (ii)  any  contingent   liabilities,   off-balance   sheet   liabilities  or
partnerships, liabilities for taxes, unusual forward or long-term commitments or

                                       47

unrealized or  anticipated  losses from any  unfavorable  commitments,  incurred
outside the ordinary  course of the  Borrower's  or such  Material  Subsidiary's
business.

         Section 7.05 Litigation.
                      ----------

               (a) Except as set forth on Schedule  7.05,  there are no material
actions,  suits,  investigations  or  proceedings by or before any arbitrator or
Governmental  Authority  pending  against or, to the  knowledge of the Borrower,
threatened against or affecting the Borrower or any Material Subsidiary 217. not
fully covered by insurance (except for normal  deductibles) as to which there is
a  reasonable  possibility  of  an  adverse  determination  that,  if  adversely
determined,  could reasonably be expected,  individually or in the aggregate, to
result in a Material  Adverse Effect,  or 218. that involve any Loan Document or
the Transactions.

               (b) Since the date of this Agreement, there has been no change in
the status of the matters  disclosed in Schedule 7.05 that,  individually  or in
the  aggregate,  has resulted in, or materially  increased the  likelihood of, a
Material Adverse Effect.

         Section 7.06 Environmental  Matters.  Except as could not be reasonably
                      ----------------------
expected to have a Material  Adverse Effect (or with respect to (c), (d) and (e)
below,  where the failure to take such actions could not be reasonably  expected
to have a Material Adverse Effect):

               (a)  neither  any  Property  of  the  Borrower  or  any  Material
Subsidiary nor the operations conducted thereon violate any order or requirement
of any court or Governmental Authority or any Environmental Laws.

               (b) no Property of the  Borrower or any Material  Subsidiary  nor
the operations currently conducted thereon or, to the knowledge of the Borrower,
by any prior owner or operator of such Property or  operation,  are in violation
of  or  subject  to  any   existing,   pending  or  threatened   action,   suit,
investigation,  inquiry or  proceeding  by or before  any court or  Governmental
Authority or to any remedial obligations under Environmental Laws.

               (c) all  notices,  permits,  licenses,  exemptions,  approvals or
similar  authorizations,  if any, required to be obtained or filed in connection
with the  operation  or use of any and all  Property  of the  Borrower  and each
Material Subsidiary,  including,  without limitation, past or present treatment,
storage,  disposal  or release of a  hazardous  substance,  oil and gas waste or
solid waste into the  environment,  have been duly  obtained  or filed,  and the
Borrower  and each  Material  Subsidiary  are in  compliance  with the terms and
conditions of all such notices, permits, licenses and similar authorizations.

               (d) all hazardous substances,  solid waste and oil and gas waste,
if any,  generated  at any and all  Property  of the  Borrower  or any  Material
Subsidiary  have in the  past  been  transported,  treated  and  disposed  of in
accordance  with  Environmental  Laws  and so as not to  pose  an  imminent  and
substantial endangerment to public health or welfare or the environment, and, to
the knowledge of the  Borrower,  all such  transport  carriers and treatment and
disposal facilities have been and are operating in compliance with Environmental
Laws and so as not to pose an imminent and  substantial  endangerment  to public
health or welfare or the  environment,  and are not the subject of any existing,
pending or  threatened  action,  investigation  or  inquiry by any  Governmental
Authority in connection with any Environmental Laws.

                                       48

               (e) the  Borrower  has taken all steps  reasonably  necessary  to
determine and has determined that no oil, hazardous  substances,  solid waste or
oil and gas waste,  have been  disposed of or  otherwise  released and there has
been no threatened release of any oil, hazardous substances,  solid waste or oil
and gas waste on or to any Property of the  Borrower or any Material  Subsidiary
except in compliance with  Environmental  Laws and so as not to pose an imminent
and substantial endangerment to public health or welfare or the environment.

               (f) to the extent  applicable,  all  Property of the Borrower and
each  Material  Subsidiary  currently  satisfies  all  design,   operation,  and
equipment  requirements  imposed by the OPA, and the Borrower  does not have any
reason to believe that such Property, to the extent subject to the OPA, will not
be able to maintain compliance with the OPA requirements during the term of this
Agreement.

               (g) neither the  Borrower  nor any  Material  Subsidiary  has any
known  contingent  liability or Remedial Work in connection  with any release or
threatened release of any oil, hazardous  substance,  solid waste or oil and gas
waste into the environment.

         Section 7.07 Compliance with the Laws and Agreements; No Defaults.
                      ----------------------------------------------------

               (a) Each of the  Borrower  and  each  Material  Subsidiary  is in
compliance with all Governmental  Requirements  applicable to it or its Property
and all agreements and other  instruments  binding upon it or its Property,  and
possesses all licenses,  permits,  franchises,  exemptions,  approvals and other
governmental  authorizations necessary for the ownership of its Property and the
conduct of its business,  except where the failure to do so,  individually or in
the aggregate,  could not reasonably be expected to result in a Material Adverse
Effect.

               (b)  Neither  the  Borrower  nor any  Material  Subsidiary  is in
default nor has any event or circumstance occurred which, but for the expiration
of any  applicable  grace  period  or the  giving  of  notice,  or  both,  would
constitute a default or would  require the Borrower or a Material  Subsidiary to
Redeem or make any offer to do any of the foregoing  under any indenture,  note,
credit  agreement or instrument  pursuant to which any Material  Indebtedness is
outstanding or by which the Borrower or any Material  Subsidiary or any of their
Properties is bound.

               (c) No Default has occurred and is continuing.

         Section  7.08  Investment  Company  Act.  Neither the  Borrower nor any
                        ------------------------
Subsidiary  is  an  "investment   company"  or  a  company  "controlled"  by  an
"investment company," within the meaning of, or subject to regulation under, the
Investment Company Act of 1940, as amended.

         Section 7.09 Public Utility Holding  Company Act.  Neither the Borrower
                      -----------------------------------
nor any  Subsidiary  is a "holding  company,"  or a  "subsidiary  company"  of a
"holding  company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," or a "public utility" within the meaning of, or
subject to regulation  under, the Public Utility Holding Company Act of 1935, as
amended.

         Section  7.10 Taxes.  Each of the  Borrower  and its  Subsidiaries  has
                       -----
timely filed or caused to be filed all Tax returns and reports  required to have
been  filed and has paid or caused  to be paid all Taxes  required  to have been

                                       49

paid by it,  except  (a)  Taxes  that  are  being  contested  in good  faith  by
appropriate  proceedings  and for  which the  Borrower  or such  Subsidiary,  as
applicable, has set aside on its books adequate reserves in accordance with GAAP
or (b) to the extent that the failure to do so could not  reasonably be expected
to result in a Material  Adverse Effect.  The charges,  accruals and reserves on
the books of the  Borrower  and its  Subsidiaries  in respect of Taxes and other
governmental  charges are, in the reasonable opinion of the Borrower,  adequate.
No Tax Lien has been filed and, to the  knowledge of the  Borrower,  no claim is
being asserted with respect to any such Tax or other such governmental charge.

         Section 7.11 ERISA.
                      -----

               (a) The Borrower,  the Subsidiaries and each ERISA Affiliate have
complied in all material  respects with ERISA and,  where  applicable,  the Code
regarding each Plan.

               (b)  Each  Plan  is,  and has  been,  maintained  in  substantial
compliance with ERISA and, where applicable, the Code.

               (c) No act,  omission or  transaction  has  occurred  which could
result in  imposition  on the Borrower,  any  Subsidiary or any ERISA  Affiliate
(whether  directly  or  indirectly)  of 239.  either  a civil  penalty  assessed
pursuant to subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed
pursuant  to Chapter 43 of  Subtitle D of the Code or 240.  breach of  fiduciary
duty liability damages under section 409 of ERISA.

               (d) No Plan (other than a defined contribution plan) or any trust
created  under any such Plan has been  terminated  since  September 2, 1974.  No
liability to the PBGC (other than for the payment of current  premiums which are
not past due) by the Borrower, any Subsidiary or any ERISA Affiliate has been or
is  expected  by the  Borrower,  any  Subsidiary  or any ERISA  Affiliate  to be
incurred  with respect to any Plan.  No ERISA Event with respect to any Plan has
occurred.

               (e) Full payment when due has been made of all amounts  which the
Borrower, the Subsidiaries or any ERISA Affiliate is required under the terms of
each Plan or applicable law to have paid as contributions to such Plan as of the
date hereof, and no accumulated funding deficiency (as defined in section 302 of
ERISA and section 412 of the Code),  whether or not waived,  exists with respect
to any Plan.

               (f) The actuarial present value of the benefit  liabilities under
each Plan which is  subject to Title IV of ERISA does not,  as of the end of the
Borrower's  most  recently  ended fiscal year,  exceed the current  value of the
assets  (computed on a plan  termination  basis in  accordance  with Title IV of
ERISA) of such Plan allocable to such benefit  liabilities.  The term "actuarial
present value of the benefit  liabilities"  shall have the meaning  specified in
section 4041 of ERISA.

               (g)  Neither  the  Borrower,   the  Subsidiaries  nor  any  ERISA
Affiliate  sponsors,  maintains,  or contributes to an employee  welfare benefit
plan, as defined in section 3(1) of ERISA,  including,  without limitation,  any
such plan maintained to provide  benefits to former  employees of such entities,
that may not be terminated by the Borrower,  a Subsidiary or any ERISA Affiliate
in its sole discretion at any time without any material liability.

                                       50

               (h)  Neither  the  Borrower,   the  Subsidiaries  nor  any  ERISA
Affiliate  sponsors,  maintains  or  contributes  to,  or has at any time in the
six-year period preceding the date hereof  sponsored,  maintained or contributed
to, any Multiemployer Plan.

               (i)  Neither  the  Borrower,   the  Subsidiaries  nor  any  ERISA
Affiliate is required to provide  security under section  401(a)(29) of the Code
due to a Plan amendment that results in an increase in current liability for the
Plan.

         Section 7.12 Disclosure;  No Material  Misstatements.  The Borrower has
                      ---------------------------------------
disclosed  to the Lenders all  agreements,  instruments  and  corporate or other
restrictions to which it or any of its Material Subsidiaries is subject, and all
other  matters  known  to it,  that,  individually  or in the  aggregate,  could
reasonably  be  expected  to result in a Material  Adverse  Effect.  Neither the
Information  Memorandum  nor any of the  other  reports,  financial  statements,
certificates or other  information  furnished by or on behalf of the Borrower or
any  Material  Subsidiary  to the  Administrative  Agent or any Lender or any of
their  Affiliates in connection  with the  negotiation  of this Agreement or any
other Loan Document or delivered  hereunder or under any other Loan Document (as
modified  or  supplemented  by other  information  so  furnished)  contains  any
material  misstatement  of fact or omits to state any material fact necessary to
make the statements  therein, in the light of the circumstances under which they
were made, not misleading;  provided that,  with respect to projected  financial
information,  the Borrower represents only that such information was prepared in
good faith based upon  assumptions  believed to be reasonable at the time. There
is no fact  peculiar to the  Borrower  or any  Material  Subsidiary  which could
reasonably  be  expected to have a Material  Adverse  Effect or in the future is
reasonably  likely to have a Material  Adverse Effect and which has not been set
forth  in  this  Agreement  or  the  Loan  Documents  or  the  other  documents,
certificates and statements furnished to the Administrative Agent or the Lenders
by or on behalf of the Borrower or any Material  Subsidiary prior to, or on, the
date hereof in connection with the transactions  contemplated  hereby. There are
no material statements or conclusions in any Reserve Report which are based upon
or  include  misleading  information  or  fail  to take  into  account  material
information regarding the matters reported therein.

         Section  7.13  Insurance.  The  Borrower  has,  and has  caused all its
                        ---------
Material  Subsidiaries to have, 249. all insurance  policies  sufficient for the
compliance by each of them with all material  Governmental  Requirements and all
material  agreements and 250. insurance coverage in at least amounts and against
such risk (including,  without  limitation,  public  liability) that are usually
insured  against by  companies  similarly  situated and engaged in the same or a
similar  business for the assets and operations of the Borrower and its Material
Subsidiaries.

         Section 7.14 Restriction on Liens.  Neither the Borrower nor any of the
                      --------------------
Material Subsidiaries is a party to any material agreement or arrangement (other
than Capital Leases creating Liens permitted by Section  9.03(c),  but then only
on the  Property  subject  of such  Capital  Lease),  or  subject  to any order,
judgment,  writ or decree,  which  either  restricts or purports to restrict its
ability  to grant  Liens to the  Administrative  Agent and the  Lenders on or in
respect of their Properties to secure the Indebtedness and the Loan Documents.

         Section 7.15  Subsidiaries.  Except as set forth on Schedule 7.15 or as
                       ------------
disclosed in writing to the Administrative Agent (which shall promptly furnish a
copy to the Lenders), which shall be a supplement to Schedule 7.15, the Borrower

                                       51

has no Subsidiaries. Schedule 7.15 identifies each Subsidiary that is a Material
Subsidiary,  and each Material  Subsidiary  on such  schedule is a  Wholly-Owned
Subsidiary.

         Section  7.16  Location  of  Business  and  Offices.   The   Borrower's
                        ------------------------------------
jurisdiction of organization is Delaware;  the name of the Borrower as listed in
the public records of its  jurisdiction  of  organization is St. Mary Land &
Exploration  Company;  and  the  organizational  identification  number  of  the
Borrower in its jurisdiction of organization is 44728. The Borrower's  principal
place of  business  and chief  executive  offices  are  located  at the  address
specified in Section  12.01 (or as set forth in a notice  delivered  pursuant to
Section 8.01(m) and Section 12.01(c)).  Each Material Subsidiary's  jurisdiction
of  organization,  name as listed in the public records of its  jurisdiction  of
organization,  organizational  identification  number  in  its  jurisdiction  of
organization,  and the  location of its  principal  place of business  and chief
executive  office  is  stated  on  Schedule  7.15  (or as set  forth in a notice
delivered pursuant to Section 8.01(m)).

         Section 7.17  Properties;  Titles,  Etc. Except for matters which could
                       -------------------------
not reasonably be expected to have a Material Adverse Effect:

               (a) Each of the Borrower and the Material  Subsidiaries  has good
and  defensible  title  to the Oil  and Gas  Properties  evaluated  in the  most
recently delivered Reserve Report and good title to all its personal Properties,
in each case,  free and clear of all Liens  except  Liens  permitted  by Section
9.03.  After  giving  full effect to the  Excepted  Liens,  the  Borrower or the
Material Subsidiary  specified as the owner owns the net interests in production
attributable  to the  Hydrocarbon  Interests as  reflected in the most  recently
delivered Reserve Report,  and the ownership of such Properties shall not in any
material respect  obligate the Borrower or such Material  Subsidiary to bear the
costs and expenses  relating to the  maintenance,  development and operations of
each such  Property  in an amount in  excess  of the  working  interest  of each
Property set forth in the most  recently  delivered  Reserve  Report that is not
offset by a  corresponding  proportionate  increase  in the  Borrower's  or such
Material Subsidiary's net revenue interest in such Property.

               (b) All material leases and agreements  necessary for the conduct
of the  business of the Borrower  and the  Material  Subsidiaries  are valid and
subsisting,  in full force and effect,  and there  exists no default or event or
circumstance  which  with the  giving of notice or the  passage  of time or both
would give rise to a default under any such lease or leases,  which would affect
in any  material  respect the conduct of the  business of the  Borrower  and the
Material Subsidiaries, taken as a whole.

               (c) The rights and Properties presently owned, leased or licensed
by the Borrower and the Material Subsidiaries including, without limitation, all
easements  and rights of way,  include all rights and  Properties  necessary  to
permit the Borrower and the Material  Subsidiaries  to conduct their business in
all  material  respects in the same manner as its  business  has been  conducted
prior to the date hereof.

                                       52

               (d)  All of the  Properties  of the  Borrower  and  the  Material
Subsidiaries  which  are  reasonably   necessary  for  the  operation  of  their
businesses are in good working  condition and are maintained in accordance  with
prudent business standards.

               (e)  The  Borrower  and  each  Material  Subsidiary  owns,  or is
licensed  to use,  all  trademarks,  tradenames,  copyrights,  patents and other
intellectual  Property  material  to its  business,  and the use  thereof by the
Borrower and such Material  Subsidiary  does not infringe upon the rights of any
other Person,  except for any such  infringements  that,  individually or in the
aggregate,  could not  reasonably  be expected  to result in a Material  Adverse
Effect.  The  Borrower and its  Material  Subsidiaries  either own or have valid
licenses or other  rights to use all  databases,  geological  data,  geophysical
data, engineering data, seismic data, maps,  interpretations and other technical
information  used in their  businesses  as presently  conducted,  subject to the
limitations  contained in the  agreements  governing the use of the same,  which
limitations  are  customary  for  companies  engaged  in  the  business  of  the
exploration  and production of  Hydrocarbons,  with such exceptions as could not
reasonably be expected to have a Material Adverse Effect.

         Section  7.18  Maintenance  of  Properties.  Except  for  such  acts or
                        ---------------------------
failures to act as could not be reasonably  expected to have a Material  Adverse
Effect, the Oil and Gas Properties (and Properties unitized therewith) have been
maintained,  operated  and  developed  in a good and  workmanlike  manner and in
conformity  with  all  Government   Requirements  and  in  conformity  with  the
provisions of all leases,  subleases or other contracts comprising a part of the
Hydrocarbon  Interests and other contracts and agreements  forming a part of the
Oil and Gas Properties.  Specifically  in connection with the foregoing,  except
for those as could not be reasonably expected to have a Material Adverse Effect,
(i) no Oil and Gas  Property is subject to having allowable  production  reduced
below  the  full  and  regular  allowable  (including  the  maximum  permissible
tolerance)  because  of  any  overproduction   (whether  or  not  the  same  was
permissible at the time) and (ii) none of the wells comprising a part of the Oil
and Gas  Properties  (or  Properties  unitized  therewith)  is deviated from the
vertical more than the maximum  permitted by Government  Requirements,  and such
wells are, in fact,  bottomed  under and are producing  from, and the well bores
are wholly  within,  the Oil and Gas Properties (or in the case of wells located
on Properties  unitized  therewith,  such unitized  Properties).  All pipelines,
wells,  gas  processing  plants,  platforms  and  other  material  improvements,
fixtures and  equipment  owned in whole or in part by the Borrower or any of its
Material  Subsidiaries that are necessary to conduct normal operations are being
maintained in a state adequate to conduct normal operations, and with respect to
such of the foregoing  which are operated by the Borrower or any of its Material
Subsidiaries,  in a  manner  consistent  with  the  Borrower's  or its  Material
Subsidiaries'  past practices (other than those the failure of which to maintain
in  accordance  with this Section 7.07 could not  reasonably be expect to have a
Material Adverse Effect).

         Section 7.19 Gas Imbalances, Prepayments. As of the date hereof, except
                      ---------------------------
as set  forth on  Schedule  7.19 or on the  most  recent  certificate  delivered
pursuant to Section 8.12(c), on a net basis there are no gas imbalances, take or
pay or other prepayments which would require the Borrower or any of its Material
Subsidiaries to deliver Hydrocarbons produced from the Oil and Gas Properties at
some future time  without then or  thereafter  receiving  full payment  therefor
exceeding one and one-half  million mcf of gas (on an mcf  equivalent  basis) in
the aggregate.

                                       53

         Section 7.20 Marketing of Production.  Except for contracts  listed and
                      -----------------------
in effect on the date hereof on Schedule 7.20, and thereafter  either  disclosed
in  writing  to the  Administrative  Agent  or  included  in the  most  recently
delivered  Reserve  Report (with respect to all of which  contracts the Borrower
represents  that it or its Material  Subsidiaries  are receiving a price for all
production sold thereunder  which is computed  substantially  in accordance with
the terms of the  relevant  contract  and are not  having  deliveries  curtailed
substantially  below the  subject  Property's  delivery  capacity),  no material
agreements  exist which are not  cancelable  on 60 days  notice or less  without
penalty or  detriment  for the sale of  production  from the  Borrower's  or its
Material Subsidiaries' Hydrocarbons (including,  without limitation, calls on or
other  rights to  purchase,  production,  whether or not the same are  currently
being  exercised)  that (a)  pertain to  the sale of production at a fixed price
and (b)  have a maturity  or expiry  date of longer than six (6) months from the
date hereof.

         Section 7.21 Swap Agreements. Schedule 7.21, as of the date hereof, and
                      ---------------
after the date  hereof,  each report  required to be  delivered  by the Borrower
pursuant to Section  8.01(d),  sets forth,  a true and complete list of all Swap
Agreements  of the Borrower and each  Material  Subsidiary,  the material  terms
thereof (including the type, term, effective date, termination date and notional
amounts or volumes),  the net mark to market value  thereof,  all credit support
agreements  relating thereto (including any margin required or supplied) and the
counterparty to each such agreement.

         Section  7.22 Use of Loans and Letters of Credit.  The  proceeds of the
                       ----------------------------------
Loans and the Letters of Credit shall be used (a) to provide working capital for
exploration,  development  and  production  operations,  (b)  to  refinance  the
acquisition of Oil & Gas  Properties,  (c) to renew,  rearrange,  modify and
extend the Debt under the Existing  Credit  Agreement  assigned  pursuant to the
Assignments,  (d) to fund the  $72,000,000  loan evidenced by the "Note" defined
and  described  in  Section  7.03  of the  Purchase  and  Sale  Agreement  (said
$72,000,000  principal  amount  being  subject to  adjustment  [higher or lower]
pursuant to the terms of the Purchase and Sale  Agreement),  and (d) for general
corporate   purposes.   The  Borrower  and  its  Subsidiaries  are  not  engaged
principally,  or as one of its or their important activities, in the business of
extending credit for the purpose, whether immediate,  incidental or ultimate, of
buying or carrying  margin stock (within the meaning of Regulation U or X of the
Board). No part of the proceeds of any Loan or Letter of Credit will be used for
any purpose which violates the provisions of Regulations U or X of the Board.

         Section  7.23  Solvency.   After  giving  effect  to  the  transactions
                        --------
contemplated  hereby,  (a) the aggregate  assets (after giving effect to amounts
that could reasonably be received by reason of indemnity,  offset,  insurance or
any  similar  arrangement),  at a  fair  valuation,  of  the  Borrower  and  the
Guarantors, taken as a whole, will exceed the aggregate Debt of the Borrower and
the  Guarantors  on a  consolidated  basis,  as the Debt  becomes  absolute  and
matures,  (b) each of the Borrower and the Guarantors  will not have incurred or
intended  to incur,  and will not believe  that it will  incur,  Debt beyond its
ability to pay such Debt (after  taking  into  account the timing and amounts of
cash to be received by each of the Borrower and the  Guarantors  and the amounts
to be payable on or in respect of its liabilities,  and giving effect to amounts
that could reasonably be received by reason of indemnity,  offset,  insurance or
any similar arrangement) as such Debt becomes  absolute and matures and (c) each
of the  Borrower  and the  Guarantors  will not have (and will have no reason to

                                       54

believe that it will have thereafter) unreasonably small capital for the conduct
of its business.

         Section 7.24 Material Agreements.  The Borrower has delivered or caused
                      -------------------
to be  delivered  to the  Administrative  Agent true and  correct  copies of the
Material Agreements. The Material Agreements have not been modified, terminated,
assigned or pledged by Borrower or any Material Subsidiary,  as applicable,  are
in full force and effect  and no party is in default in the  performance  of its
obligations thereunder.

                                  ARTICLE VIII
                              Affirmative Covenants

         Until the Commitments have expired or been terminated and the principal
of and  interest  on each  Loan and all fees  payable  hereunder  and all  other
amounts  payable under the Loan  Documents  shall have been paid in full and all
Letters of Credit  shall have  expired or  terminated  and all LC  Disbursements
shall have been reimbursed,  the Borrower  covenants and agrees with the Lenders
that:

         Section 8.01 Financial  Statements;  Ratings Change; Other Information.
                      ---------------------------------------------------------
The Borrower will furnish to the Administrative Agent and each Lender:

               (a) Annual Financial Statements.  Within 90 days after the end of
                   ---------------------------
each fiscal year of the  Borrower,  its audited  consolidated  balance sheet and
related statements of operations,  stockholders' equity and cash flows as of the
end of and for such year,  setting  forth in each case in  comparative  form the
figures for the previous  fiscal year, all reported on by Deloitte &  Touche
or other independent public accountants of recognized national standing (without
a  "going  concern"  or  like   qualification   or  exception  and  without  any
qualification  or  exception  as to the scope of such  audit) to the effect that
such consolidated  financial  statements present fairly in all material respects
the  financial  condition  and results of  operations  of the  Borrower  and its
Consolidated  Subsidiaries  on a  consolidated  basis in  accordance  with  GAAP
consistently applied.

               (b) Quarterly Financial Statements.  Within 45 days after the end
                   ------------------------------
of each of the first three fiscal  quarters of each fiscal year of the Borrower,
its   consolidated   balance  sheet  and  related   statements  of   operations,
stockholders' equity and cash flows as of the end of and for such fiscal quarter
and the then elapsed  portion of the fiscal year,  setting forth in each case in
comparative form the figures for the corresponding  period or periods of (or, in
the case of the balance sheet,  as of the end of) the previous  fiscal year, all
certified by one of its Financial  Officers as presenting fairly in all material
respects the  financial  condition and results of operations of the Borrower and
its  Consolidated  Subsidiaries on a consolidated  basis in accordance with GAAP
consistently  applied,  subject to normal  year-end  audit  adjustments  and the
absence of footnotes.

               (c) Certificate of Financial Officer -- Compliance.  Concurrently
                   ----------------------------------------------
with any  delivery of  financial  statements  under  Section  8.01(a) or Section
8.01(b),  a  certificate  of a Financial  Officer in  substantially  the form of
Exhibit B  hereto (i)  certifying as to whether a Default has occurred and, if a
Default has  occurred,  specifying  the details  thereof and any action taken or

                                       55

proposed  to be taken  with  respect  thereto,  (ii)  setting  forth  reasonably
detailed calculations  demonstrating compliance with Section 8.13(b) and Section
9.01 and (iii) stating whether any change in GAAP or in the application  thereof
has occurred since the date of the audited financial  statements  referred to in
Section 7.04 and, if any such change has occurred, specifying the effect of such
change on the financial statements accompanying such certificate.

               (d) Listing of Swap Agreements. Concurrently with any delivery of
                   --------------------------
financial  statements  under  Section  8.01(a) and Section  8.01(b),  a true and
complete  list  of  all  Swap  Agreements  of the  Borrower  and  each  Material
Subsidiary  as of the last  Business Day of such fiscal  quarter or fiscal year,
which  shall  depict the  material  terms  thereof  (including  the type,  term,
effective  date,  termination  date and notional  amounts or  volumes),  the net
mark-to-market  value  therefor,  any new  credit  support  agreements  relating
thereto not listed on Schedule 7.20,  any margin  required or supplied under any
credit support document, and the counterparty to each such agreement.

               (e)  Certificate of Insurer -- Insurance  Coverage.  Concurrently
                    ---------------------------------------------
with any delivery of financial  statements under Section 8.01(a),  a certificate
of insurance  coverage from each insurer with respect to the insurance  required
by Section 8.07, in form and substance satisfactory to the Administrative Agent,
and, if requested by the  Administrative  Agent or any Lender, all copies of the
applicable policies.

               (f) Other Accounting  Reports.  Promptly upon receipt thereof,  a
                   -------------------------
copy of each other  report or letter  submitted  to the  Borrower  or any of its
Subsidiaries by independent  accountants in connection with any annual,  interim
or  special  audit  made  by them  of the  books  of the  Borrower  or any  such
Subsidiary,  and a copy of any response by the Borrower or any such  Subsidiary,
or the Board of Directors of the Borrower or any such Subsidiary, to such letter
or report.

               (g) SEC and Other  Filings;  Reports  to  Shareholders.  Promptly
                   --------------------------------------------------
after the same  become  publicly  available,  copies of all  periodic  and other
reports,  proxy  statements  and other  materials  filed by the  Borrower or any
Subsidiary  with  the  SEC,  or  with  any  national  securities  exchange,   or
distributed by the Borrower to its shareholders generally, as the case may be.

               (h)  Notices  Under  Material  Instruments.  Promptly  after  the
                    -------------------------------------
furnishing  thereof,  copies  of  any  financial  statement,  report  or  notice
furnished  to or by any  Person  pursuant  to the terms of any  preferred  stock
designation,  indenture,  loan or credit or other similar agreement,  other than
this  Agreement  and not  otherwise  required  to be  furnished  to the  Lenders
pursuant to any other provision of this Section 8.01.

               (i) Lists of Purchasers.  Promptly  following the written request
                   -------------------
from  the  Administrative  Agent  thereof,  a  list  of all  Persons  purchasing
Hydrocarbons from the Borrower or any Material Subsidiary.

               (j) Notice of Sales of Oil and Gas  Properties.  In the event the
                   ------------------------------------------
Borrower  or any  Material  Subsidiary  intends  to sell,  transfer,  assign  or
otherwise  dispose of any Oil or Gas  Properties or any Equity  Interests in any
Subsidiary  in  accordance  with  Section  9.13 for  consideration  in excess of

                                       56

$1,000,000,  prior written notice of such disposition, the price thereof and the
anticipated date of closing.

               (k) Notice of Casualty Events.  Prompt written notice, and in any
                   -------------------------
event within three Business Days, of the occurrence of any Casualty Event or the
commencement  of any action or proceeding  that could  reasonably be expected to
result in a Casualty Event.

               (l)  Issuance of  Permitted  Refinancing  Debt.  In the event the
                    -----------------------------------------
Borrower   intends  to  refinance  any  Debt  with  the  proceeds  of  Permitted
Refinancing Debt, prior written notice of such intended offering  therefor,  the
amount  thereof and the  anticipated  date of closing and will furnish a copy of
the preliminary  offering  memorandum (if any) and the final offering memorandum
(if any).

               (m) Information Regarding Borrower and Guarantors. Prompt written
                   ---------------------------------------------
notice (and in any event within thirty (30) days upon becoming aware thereof) of
any change (i)  in the  Borrower  or any  Guarantor's  corporate  name or in any
trade name used to identify such Person in the conduct of its business or in the
ownership  of its  Properties,  (ii)  in the  location  of the  Borrower  or any
Guarantor's  chief executive office or principal place of business, (iii) in the
Borrower  or  any  Guarantor's   identity  or  corporate  structure  or  in  the
jurisdiction  in which  such  Person is  incorporated  or  formed,  (iv)  in the
Borrower  or any  Guarantor's  jurisdiction  of  organization  or such  Person's
organizational  identification number in such jurisdiction of organization,  and
(v) in the Borrower  or  any Guarantor's federal taxpayer identification number.

               (n) Other Requested  Information.  Promptly following any request
                   ----------------------------
therefor, such other information regarding the operations,  business affairs and
financial  condition  of the  Borrower  or any  Subsidiary  (including,  without
limitation,  any Plan or Multiemployer Plan and any reports or other information
required  to be  filed  under  ERISA),  or  compliance  with  the  terms of this
Agreement or any other Loan Document,  as the Administrative Agent or any Lender
may reasonably request.

         Section 8.02 Notices of Material  Events.  The Borrower will furnish to
                      ---------------------------
the Administrative Agent and each Lender prompt written notice of the following:

               (a) the occurrence of any Default;

               (b) the filing or commencement of any action,  suit or proceeding
by or before any arbitrator or Governmental  Authority  against or affecting the
Borrower  or  any  Affiliate  thereof  that,  if  adversely  determined,   could
reasonably be expected to result in a Material Adverse Effect;

               (c) the  occurrence  of any ERISA Event  that,  alone or together
with any other ERISA Events that have occurred,  could reasonably be expected to
result in liability of the Borrower and its  Subsidiaries in an aggregate amount
exceeding $2,000,000; and

               (d) any other development that results in, or could reasonably be
expected to result in, a Material Adverse Effect.

                                       57

Each  notice  delivered  under  this  Section  8.02  shall be  accompanied  by a
statement of a  Responsible  Officer  setting  forth the details of the event or
development  requiring  such notice and any action taken or proposed to be taken
with respect thereto.

         Section 8.03  Existence;  Conduct of Business.  The Borrower  will, and
                       -------------------------------
will  cause  each  Material  Subsidiary  to,  do or cause to be done all  things
necessary  to  preserve,  renew  and keep in full  force  and  effect  its legal
existence and the rights, licenses,  permits, privileges and franchises material
to the conduct of its business and maintain, if necessary,  its qualification to
do business in each other  jurisdiction  in which its Oil and Gas  Properties is
located or the ownership of its Properties requires such  qualification,  except
where the  failure to so qualify  could not  reasonably  be  expected  to have a
Material  Adverse  Effect;  provided that the  foregoing  shall not prohibit any
merger, consolidation, liquidation or dissolution permitted under Section 9.12.

         Section 8.04 Payment of Obligations.  The Borrower will, and will cause
                      ----------------------
each Material  Subsidiary to, pay its obligations,  including Tax liabilities of
the Borrower and all of its Subsidiaries before the same shall become delinquent
or in  default,  except  where  (a)  the  validity  or  amount  thereof is being
contested in good faith by  appropriate  proceedings,  (b) the  Borrower or such
Material  Subsidiary has set aside on its books  adequate  reserves with respect
thereto in  accordance  with GAAP and (c) the failure  to make  payment  pending
such contest could not  reasonably  be expected to result in a Material  Adverse
Effect or result in the seizure or levy of any  Property of the  Borrower or any
Subsidiary.

         Section 8.05  Performance  of  Obligations  under Loan  Documents.  The
                       ---------------------------------------------------
Borrower will pay the Notes according to the reading,  tenor and effect thereof,
and the Borrower will and will cause each Material  Subsidiary to do and perform
every act and discharge all of the obligations to be performed and discharged by
them under the Loan Documents, including, without limitation, this Agreement, at
the time or times and in the manner specified.

         Section  8.06  Operation  and  Maintenance  of  Properties.  Except for
                        -------------------------------------------
matters that could not  reasonably  be expected to result in a Material  Adverse
Effect,  the Borrower,  at its own expense,  will,  and will cause each Material
Subsidiary to:

               (a)  operate  its Oil  and  Gas  Properties  and  other  material
Properties or cause such Oil and Gas Properties and other material Properties to
be operated in a careful and efficient  manner in accordance  with the practices
of the industry and in compliance  with all applicable  contracts and agreements
and  in  compliance  with  all  Governmental  Requirements,  including,  without
limitation,  applicable pro ration  requirements and Environmental Laws, and all
applicable  laws,  rules and regulations of every other  Governmental  Authority
from time to time  constituted to regulate the  development and operation of its
Oil and Gas Properties and the  production  and sale of  Hydrocarbons  and other
minerals therefrom,  except, in each case, where the failure to comply could not
reasonably be expected to have a Material Adverse Effect.

               (b) keep and maintain all Property material to the conduct of its
business in good working  order and  condition,  ordinary wear and tear excepted
preserve,  maintain  and  keep in good  repair,  working  order  and  efficiency
(ordinary wear and tear excepted) all of its material Oil and Gas Properties and
other  material  Properties,   including,  without  limitation,  all  equipment,
machinery and facilities.

               (c) promptly pay and discharge,  or make reasonable and customary
efforts  to cause to be paid  and  discharged,  all  delay  rentals,  royalties,
expenses  and  indebtedness  accruing  under  the  leases  or  other  agreements
affecting  or  pertaining  to its Oil and Gas  Properties  and will do all other
things  necessary  to keep  unimpaired  their  rights with  respect  thereto and
prevent any forfeiture thereof or default thereunder.

               (d) promptly perform or make reasonable and customary  efforts to
cause to be performed,  in accordance with industry  standards,  the obligations
required  by  each  and  all  of the  assignments,  deeds,  leases,  sub-leases,
contracts and  agreements  affecting its interests in its Oil and Gas Properties
and other material Properties.

               (e)  operate  its Oil  and  Gas  Properties  and  other  material
Properties or cause or make  reasonable and customary  efforts to cause such Oil
and Gas Properties  and other  material  Properties to be operated in accordance
with  the  practices  of  the  industry  and in  material  compliance  with  all
applicable  contracts and agreements and in compliance in all material  respects
with all Governmental Requirements.

               (f) to the extent the  Borrower or a Material  Subsidiary  is not
the operator of any Property, the Borrower shall use reasonable efforts to cause
the operator to comply with this Section 8.06.

         Section 8.07 Insurance. The Borrower will, and will cause each Material
                      ---------
Subsidiary  to,  maintain,   with  financially  sound  and  reputable  insurance
companies,  insurance in such amounts and against such risks as are  customarily
maintained by companies engaged in the same or similar  businesses  operating in
the same or similar locations.

         Section 8.08 Books and Records;  Inspection  Rights. The Borrower will,
                      --------------------------------------
and will cause each  Material  Subsidiary  to, keep  proper  books of record and
account in which full,  true and correct  entries are made of all  dealings  and
transactions in relation to its business and activities.  The Borrower will, and
will cause each Material Subsidiary to, permit any representatives designated by
the Administrative  Agent or any Lender,  upon reasonable prior notice, to visit
and inspect its  Properties,  to examine  and make  extracts  from its books and
records,  and to discuss its affairs,  finances and condition  with its officers
and  independent  accountants,  all at such  reasonable  times  and as  often as
reasonably requested.

         Section 8.09  Compliance  with Laws.  The Borrower will, and will cause
                       ---------------------
each Material Subsidiary to, comply with all laws, rules, regulations and orders
of any Governmental Authority applicable to it or its Property, except where the
failure to do so,  individually  or in the  aggregate,  could not  reasonably be
expected to result in a Material Adverse Effect.

         Section 8.10 Environmental Matters.
                      ---------------------

               (a) The Borrower shall at its sole expense: (i) comply, and shall
cause its Properties and  operations and each  Subsidiary and each  Subsidiary's
Properties and operations to comply, with all applicable Environmental Laws, the
breach of which could be reasonably  expected to have a Material Adverse Effect;
(ii) not dispose of or otherwise release, and shall cause each Subsidiary not to
dispose  of or  otherwise  release,  any  oil,  oil  and  gas  waste,  hazardous
substance,  or solid waste on, under, about or from any of the Borrower's or its

                                       59

Subsidiaries'  Properties  or any other  Property  to the  extent  caused by the
Borrower's or any of its  Subsidiaries'  operations  except in  compliance  with
applicable Environmental Laws, the disposal or release of which could reasonably
be expected to have a Material Adverse Effect;  (iii) timely obtain or file, and
shall cause each  Subsidiary  to timely  obtain or file,  all notices,  permits,
licenses, exemptions, approvals,  registrations or other authorizations, if any,
required  under  applicable  Environmental  Laws  to be  obtained  or  filed  in
connection  with the  operation or use of the  Borrower's  or its  Subsidiaries'
Properties, which failure to obtain or file could reasonably be expected to have
a Material Adverse Effect;  (iv) promptly  commence and diligently  prosecute to
completion,  and shall cause each Subsidiary to promptly commence and diligently
prosecute to completion, any assessment, evaluation, investigation,  monitoring,
containment,  cleanup,  removal,  repair,  restoration,   remediation  or  other
remedial  obligations  (collectively,  the  "Remedial  Work")  in the  event any
                                             --------------
Remedial Work is required or reasonably necessary under applicable Environmental
Laws because of or in connection with the actual or suspected  past,  present or
future  disposal  or other  release  of any oil,  oil and gas  waste,  hazardous
substance or solid waste on, under,  about or from any of the  Borrower's or its
Subsidiaries' Properties,  which failure to commence and diligently prosecute to
completion could  reasonably be expected to have a Material Adverse Effect;  and
(v) establish and  implement,  and shall cause each  Subsidiary to establish and
implement,  such  procedures as may be necessary to  continuously  determine and
assure that the Borrower's and its Subsidiaries'  obligations under this Section
8.10(a) are timely and fully satisfied, which failure to establish and implement
could reasonably be expected to have a Material Adverse Effect.

               (b) The Borrower will  promptly,  but in no event later than five
days of the occurrence of a triggering event,  notify the  Administrative  Agent
and the Lenders in writing of any threatened action, investigation or inquiry by
any Governmental  Authority or any threatened demand or lawsuit by any landowner
or  other  third  party  against  the  Borrower  or its  Subsidiaries  or  their
Properties  of  which  the  Borrower  has  knowledge  in  connection   with  any
Environmental  Laws  (excluding  routine  testing and corrective  action) if the
Borrower  reasonably  anticipates  that such  action  will  result in  liability
(whether  individually  or in the  aggregate)  in excess of $500,000,  not fully
covered by insurance, subject to normal deductibles.

               (c) In  connection  with any future  acquisitions  of Oil and Gas
Properties or other Properties, the Borrower will and will cause each Subsidiary
to provide environmental audits and tests in accordance with American Society of
Testing  Materials  standards upon request by the  Administrative  Agent and the
Lenders,  except in  circumstances  in which the Borrower or any  Subsidiary  is
acquiring an additional interest in an Oil and Gas Property or other Property.

         Section 8.11 Further Assurances.
                      ------------------

               (a) The  Borrower  at its  expense  will,  and  will  cause  each
Material Subsidiary to, promptly execute and deliver to the Administrative Agent
all such other documents, agreements and instruments reasonably requested by the
Administrative  Agent  to  comply  with,  cure any  defects  or  accomplish  the
conditions  precedent,  covenants and agreements of the Borrower or any Material
Subsidiary,  as the case may be, in the Loan Documents,  including the Notes, or
to further evidence and more fully describe the collateral  intended as security
for the  Indebtedness,  or to correct any  omissions  in this  Agreement  or the
Security Instruments, or to state more fully the obligations secured therein, or

                                       60

to perfect,  protect or preserve any Liens created pursuant to this Agreement or
any of the  Security  Instruments  or  the  priority  thereof,  or to  make  any
recordings,  file any notices or obtain any  consents,  all as may be reasonably
necessary or  appropriate,  in the reasonable  discretion of the  Administrative
Agent, in connection therewith.

               (b) The Borrower hereby  authorizes the  Administrative  Agent to
file one or more financing or continuation  statements,  and amendments thereto,
relative to all or any part of the Mortgaged  Property  without the signature of
the  Borrower  or any  Material  Subsidiary  where  permitted  by law. A carbon,
photographic or other reproduction of the Security  Instruments or any financing
statement  covering  the  Mortgaged  Property  or  any  part  thereof  shall  be
sufficient as a financing  statement where permitted by law. The  Administrative
Agent will promptly send the Borrower any financing or  continuation  statements
it files  without the  signature of the Borrower or any other  Guarantor and the
Administrative  Agent will promptly send the Borrower the filing or  recordation
information with respect thereto.

         Section 8.12 Reserve Reports.
                      ---------------

               (a) On or before  February 28th (or February 29th, as applicable)
and July 31st of each year,  commencing  February 28, 2003,  the Borrower  shall
furnish  to the  Administrative  Agent and the  Lenders a  Reserve  Report.  The
Reserve  Report as of  December 31 of each year shall be prepared by one or more
Approved Petroleum Engineers,  and the June 30 Reserve Report of each year shall
be prepared by or under the supervision of the Manager of Reservoir  Engineering
of the  Borrower who shall  certify such Reserve  Report to be true and accurate
and to  have  been  prepared  in  accordance  with  the  procedures  used in the
immediately preceding December 31 Reserve Report.

               (b) In the  event of an  Interim  Redetermination,  the  Borrower
shall  furnish  to the  Administrative  Agent and the  Lenders a Reserve  Report
prepared by or under the supervision of the Manager of Reservoir  Engineering of
the Borrower who shall  certify such Reserve  Report to be true and accurate and
to have been prepared in accordance  with the procedures used in the immediately
preceding December 31 Reserve Report. For any Interim Redetermination  requested
by the  Administrative  Agent or the Borrower  pursuant to Section 2.07(b),  the
Borrower  shall provide such Reserve  Report with an "as of" date as required by
the  Administrative  Agent as soon as  possible,  but in any event no later than
thirty (30) days following the receipt of such request.

               (c) With the delivery of each Reserve Report,  the Borrower shall
provide  to the  Administrative  Agent  and the  Lenders  a  certificate  from a
Responsible   Officer  certifying  that  in  all  material  respects:   (i)  the
information  contained in the Reserve Report and any other information delivered
in connection  therewith is true and correct,  (ii) the Borrower or its Material
Subsidiaries  owns  good  and  defensible  title  to the Oil and Gas  Properties
evaluated  in such  Reserve  Report  and such  Properties  are free of all Liens
except for Liens  permitted  by  Section  9.03,  (iii) except as set forth on an
exhibit to the certificate,  on a net basis there are no gas imbalances, take or
pay or other  prepayments in excess of the volume specified in Section 7.19 with
respect to its Oil and Gas  Properties  evaluated in such  Reserve  Report which
would require the Borrower or any Material  Subsidiary  to deliver  Hydrocarbons
either  generally or produced  from such Oil and Gas  Properties  at some future

                                       61

time without then or thereafter  receiving full payment  therefor,  (iv) none of
their Oil and Gas Properties have been sold since the date of the last Borrowing
Base determination  except as set forth on an exhibit to the certificate,  which
certificate shall list all of its Oil and Gas Properties sold and in such detail
as  reasonably  required  by the  Administrative  Agent,  (v)  attached  to  the
certificate is a list of all marketing agreements entered into subsequent to the
later of the date hereof or the most recently delivered Reserve Report which the
Borrower could reasonably be expected to have been obligated to list on Schedule
7.20 had such agreement  been in effect on the date hereof and attached  thereto
is a schedule of the Oil and Gas  Properties  evaluated by such  Reserve  Report
that are Mortgaged  Properties and demonstrating the percentage of the Borrowing
Base that the value of such Mortgaged Properties represent.

         Section 8.13 Title Information.
                      -----------------

               (a) On or before the delivery to the Administrative Agent and the
Lenders of each Reserve Report  required by Section  8.12(a),  the Borrower will
deliver title information in form and substance acceptable to the Administrative
Agent covering  enough of the Oil and Gas  Properties  evaluated by such Reserve
Report that were not included in the immediately  preceding  Reserve Report,  so
that  the   Administrative   Agent  shall  have  received  together  with  title
information previously delivered to the Administrative Agent, satisfactory title
information  on at least  75% of the total  value of the Oil and Gas  Properties
evaluated by such Reserve Report.

               (b) If the Borrower has provided title information for additional
Properties under Section 8.13(a),  the Borrower shall,  within 60 days of notice
from the  Administrative  Agent that  title  defects  or  exceptions  exist with
respect to such additional  Properties,  either (i) cure any such  title defects
or exceptions  (including  defects or  exceptions as to priority)  which are not
permitted by Section 9.03 raised by such information, (ii) substitute acceptable
Mortgaged  Properties  with no title defects or  exceptions  except for Excepted
Liens (other than Excepted  Liens  described in clauses (e), (g) and (h) of such
definition) having an equivalent value or (iii)deliver title information in form
and substance  acceptable to the Administrative Agent so that the Administrative
Agent shall have received,  together with title information previously delivered
to the Administrative  Agent,  satisfactory title information on at least 75% of
the value of the Oil and Gas Properties evaluated by such Reserve Report.

               (c) If the Borrower is unable to cure any title defect  requested
by the Administrative  Agent or the Lenders to be cured within the 60-day period
or the  Borrower  does not comply with the  requirements  to provide  acceptable
title  information  covering  75% of the  value  of the Oil  and Gas  Properties
evaluated  in the most  recent  Reserve  Report,  such  default  shall  not be a
Default,  but instead the Administrative Agent and/or the Majority Lenders shall
have the right to exercise the following  remedy in their sole  discretion  from
time to time,  and any failure to so exercise  this remedy at any time shall not
be a waiver as to future exercise of the remedy by the  Administrative  Agent or
the Lenders. To the extent that the Administrative Agent or the Majority Lenders
are not satisfied  with title to any Mortgaged  Property after the 60-day period
has elapsed,  such unacceptable  Mortgaged  Property shall not count towards the
75% requirement,  and the Administrative Agent may send a notice to the Borrower
and the Lenders that the then outstanding  Borrowing Base shall be reduced by an
amount as  determined  by the  Majority  Lenders to cause the  Borrower to be in

                                       62

compliance with the requirement to provide  acceptable title  information on 75%
of the value of the Oil and Gas Properties. This new Borrowing Base shall become
effective immediately after receipt of such notice.

         Section 8.14 Additional Collateral; Additional Guarantors.
                      --------------------------------------------

               (a) In  connection  with each  redetermination  of the  Borrowing
Base,  the  Borrower  shall  review the  Reserve  Report and the list of current
Mortgaged  Properties (as described in Section 8.12(c)(vi)) to ascertain whether
the  Mortgaged  Properties  represent at least 75% of the total value of the Oil
and Gas Properties evaluated in the most recently completed Reserve Report after
giving  effect  to   exploration   and  production   activities,   acquisitions,
dispositions and production.  In the event that the Mortgaged  Properties do not
represent at least 75% of such total value,  then the Borrower shall,  and shall
cause  its  Material  Subsidiaries  to,  grant  to the  Administrative  Agent as
security for the  Indebtedness a first-priority  Lien interest  (subject only to
Excepted  Liens  of the  type  described  in  clauses  (a) to (d) and (f) of the
definition  thereof,  but subject to the provisos at the end of such definition)
on  additional  Oil and Gas  Properties  not  already  subject  to a Lien of the
Security  Instruments  such that after  giving  effect  thereto,  the  Mortgaged
Properties will represent at least 75% of such total value.  All such Liens will
be created and  perfected by and in accordance  with the  provisions of deeds of
trust,   security   agreements  and  financing   statements  or  other  Security
Instruments,   all  in  form  and  substance  reasonably   satisfactory  to  the
Administrative   Agent  and  in  sufficient  executed  (and  acknowledged  where
necessary or  appropriate)  counterparts  for  recording  purposes.  In order to
comply with the foregoing,  if any Material  Subsidiary places a Lien on its Oil
and Gas  Properties  and such Material  Subsidiary  is not a Guarantor,  then it
shall become a Guarantor and comply with Section 8.14(b).

               (b)  In  the  event  that  any  Subsidiary   becomes  a  Material
Subsidiary  after the Closing  Date,  the  Borrower  shall  promptly  cause such
Subsidiary to guarantee the Indebtedness pursuant to the Guaranty Agreement.  In
connection  with any such  guaranty,  the  Borrower  shall,  or shall cause such
Subsidiary to, (A)  execute  and deliver a supplement to the Guaranty  Agreement
executed by such Subsidiary, (B) pledge  all of the Equity Interests of such new
Subsidiary   (including,   without   limitation,   delivery  of  original  stock
certificates  evidencing the Equity Interests of such Subsidiary,  together with
an appropriate  undated stock powers for each certificate duly executed in blank
by the  registered  owner  thereof)  and (C)  execute  and  deliver  such  other
additional  closing   documents,   certificates  and  legal  opinions  as  shall
reasonably be requested by the Administrative Agent.

         Section 8.15 ERISA  Compliance.  The Borrower will promptly furnish and
                      -----------------
will cause the  Subsidiaries  and any ERISA Affiliate to promptly furnish to the
Administrative  Agent (i)  promptly  after the filing  thereof  with the United
States Secretary of Labor,  the Internal Revenue Service or the PBGC,  copies of
each  annual and other  report  with  respect to each Plan or any trust  created
thereunder,  (ii) immediately upon becoming aware of the occurrence of any ERISA
Event or of any "prohibited  transaction,"  as described in section 406 of ERISA
or in section 4975 of the Code, in connection with any Plan or any trust created
thereunder,  a written notice signed by the President or the principal Financial
Officer,  the Subsidiary or the ERISA Affiliate,  as the case may be, specifying
the nature  thereof,  what  action the  Borrower,  the  Subsidiary  or the ERISA
Affiliate is taking or proposes to take with respect  thereto,  and, when known,

                                       63

any action taken or proposed by the Internal Revenue Service,  the Department of
Labor or the PBGC  with  respect  thereto,  and (iii) immediately  upon  receipt
thereof,  copies of any notice of the PBGC's intention to terminate or to have a
trustee  appointed to administer any Plan. With respect to each Plan (other than
a  Multiemployer  Plan),  the Borrower will, and will cause each  Subsidiary and
ERISA Affiliate to, (i)satisfy in full and in a timely manner, without incurring
any late payment or  underpayment  charge or penalty and without  giving rise to
any lien, all of the contribution and funding requirements of section 412 of the
Code  (determined  without regard to subsections  (d), (e), (f) and (k) thereof)
and of section 302 of ERISA (determined  without regard to sections 303, 304 and
306 of ERISA), and (ii)pay, or cause to be paid, to the PBGC in a timely manner,
without  incurring  any late  payment or  underpayment  charge or  penalty,  all
premiums required pursuant to sections 4006 and 4007 of ERISA.

         Section 8.16  Performance  of Material  Agreements.  The Borrower  will
                       ------------------------------------
perform and observe,  and cause each Material Subsidiary to perform and observe,
in all material  respects each of the  provisions of the Material  Agreements to
which  it is a party  on its  part to be  performed  or  observed  prior  to the
termination thereof.

                                   ARTICLE IX
                               Negative Covenants

         Until the  Commitments  have expired or terminated and the principal of
and interest on each Loan and all fees payable  hereunder  and all other amounts
payable  under the Loan  Documents  have been  paid in full and all  Letters  of
Credit  have  expired or  terminated  and all LC  Disbursements  shall have been
reimbursed, the Borrower covenants and agrees with the Lenders that:

         Section 9.01 Financial Covenants.
                      -------------------

               (a) Ratio of Total Debt to EBITDA.  The Borrower will not, at any
                   -----------------------------
time,  permit  its ratio of Total  Debt as of such  time to EBITDA  for the four
fiscal  quarters  ending  on the  last  day of the  fiscal  quarter  immediately
preceding the date of determination for which financial statements are available
to be greater than 3.0 to 1.0.

               (b) Current Ratio.  The Borrower will not permit,  as of the last
                   -------------
day  of  any  fiscal  quarter,  its  ratio  of (i) consolidated  current  assets
(including  the  unused  amount of the  total  Commitments) to (ii) consolidated
current  liabilities  (excluding  non-cash  obligations  under  FAS  133 and the
current portion of the Aggregate Commitment) to be less than 1.0 to 1.0.

         Section 9.02 Debt.  Neither the  Borrower  nor any Material  Subsidiary
                      ----
will incur, create, assume or suffer to exist any Debt, except:

               (a) the  Notes  or  other  Indebtedness  arising  under  the Loan
Documents or any guaranty of or  suretyship  arrangement  for the Notes or other
Indebtedness arising under the Loan Documents.

               (b) Debt of the Borrower and its Material  Subsidiaries  existing
on the date  hereof  that is  reflected  in the  Financial  Statements,  and any
Permitted Refinancing Debt in respect thereof.

                                       64

               (c) accounts payable (for the deferred purchase price of Property
or services) from time to time incurred in the ordinary course of business which
are not greater than sixty (60) days past the date of invoice or  delinquent  or
which are being  contested  in good  faith by  appropriate  action and for which
adequate reserves have been maintained in accordance with GAAP.

               (d) Debt under Capital Leases not to exceed $5,000,000.

               (e) Debt associated with bonds or surety obligations  required by
Governmental  Requirements  in connection  with the operation of the Oil and Gas
Properties.

               (f)  intercompany  Debt  between the  Borrower  and any  Material
Subsidiary or between  Material  Subsidiaries to the extent permitted by Section
9.05(g); provided that such Debt is not held, assigned, transferred,  negotiated
or pledged to any Person  other  than the  Borrower  or one of its  Wholly-Owned
Subsidiaries,  and,  provided  further,  that any such Debt  owed by either  the
Borrower or a Guarantor shall be  subordinated to the  Indebtedness on terms set
forth in the Guaranty Agreement.

               (g) endorsements of negotiable  instruments for collection in the
ordinary course of business.

               (h) non-recourse  Debt secured by Property other than Oil and Gas
Properties  evaluated by the Lenders for purposes of establishing  the Borrowing
Base not to exceed $10,000,000 in the aggregate at any one time outstanding.

               (i) other Debt not to exceed  $5,000,000  in the aggregate at any
one time outstanding.

         Section 9.03 Liens.  Neither the  Borrower nor any Material  Subsidiary
                      -----
will create,  incur, assume or permit to exist any Lien on any of its Properties
(now owned or hereafter acquired), except:

               (a) Liens securing the payment of any Indebtedness.

               (b) Excepted Liens.

               (c) Liens securing  Capital Leases  permitted by Section  9.02(d)
but only on the Property under lease.

               (d) Liens securing any Permitted  Refinancing  Debt provided that
any  such  Permitted  Refinancing  Debt  is not  secured  by any  additional  or
different Property not securing the Refinanced Debt.

               (e) Liens on Property  securing  non-recourse  Debt  permitted by
Section 9.02(h).

         Section 9.04 Dividends,  Distributions  and  Redemptions.  The Borrower
                      -------------------------------------------
will not, and will not permit any of its  Subsidiaries  to,  declare or make, or
agree to pay or make, directly or indirectly, any Restricted Payment, return any

                                       65

capital to its  stockholders  or make any  distribution  of its  Property to its
Equity Interest  holders,  except (a) the Borrower may declare and pay dividends
with respect to its Equity Interests  payable solely in additional shares of its
common stock (other than Disqualified Capital Stock), (b) so long as no Event of
Default shall have occurred  which is  continuing,  the Borrower may declare and
pay annual cash dividends not to exceed $.20 per common share, (c)  Subsidiaries
may declare and pay  dividends  ratably with respect to their Equity  Interests,
and (d) the Borrower may make Restricted  Payments pursuant to and in accordance
with stock option plans or other  benefit  plans for  management or employees of
the Borrower and its Subsidiaries.

         Section 9.05 Investments,  Loans and Advances. Neither the Borrower nor
                      --------------------------------
any  Material   Subsidiary  will  make  or  permit  to  remain  outstanding  any
Investments in or to any Person, except that the foregoing restriction shall not
apply to:

               (a)  Investments  reflected in the Financial  Statements or which
are disclosed to the Lenders in Schedule 9.05(a).

               (b)  accounts  receivable  arising  in  the  ordinary  course  of
business.

               (c)  direct  obligations  of the  United  States  or  any  agency
thereof,  or obligations  guaranteed by the United States or any agency thereof,
in each case maturing within one year from the date of creation thereof.

               (d) commercial  paper  maturing  within one year from the date of
creation thereof rated in the highest grade by S&P or Moody's.

               (e) deposits  maturing  within one year from the date of creation
thereof with,  including  certificates  of deposit  issued by, any Lender or any
office  located in the United States of any other bank or trust company which is
organized under the laws of the United States or any state thereof, has capital,
surplus and undivided profits  aggregating at least $100,000,000 (as of the date
of such bank or trust company's most recent  financial  reports) and has a short
term deposit  rating of no lower than A2 or P2, as such rating is set forth from
time to time, by S&P or Moody's, respectively or, in the case of any Foreign
Subsidiary,  a bank organized in a jurisdiction in which the Foreign  Subsidiary
conducts  operations  having assets in excess of $500,000,000 (or its equivalent
in another currency).

               (f)  deposits in money  market  funds  investing  exclusively  in
Investments described in Section 9.05(c), Section 9.05(d) or Section 9.05(e).

               (g) Investments 39. made by the Borrower in or to the Guarantors,
and 40. made by a Guarantor in or to the Borrower or any other Guarantor.

               (h)   subject  to  the  limits  in  Section   9.07,   Investments
(including,  without  limitation,  capital  contributions) in general or limited
partnerships  or other types of entities (each a "venture")  entered into by the
                                                  -------
Borrower  or a  Material  Subsidiary  with  others  in the  ordinary  course  of
business;  provided that (i) any such venture is engaged  exclusively in oil and
gas exploration,  development,  production,  processing and related  activities,
including transportation,  except for existing Investments described or referred
to on Schedule  9.05(h) and Investments  permitted by Section  9.05(i), (ii) the

                                       66

interest in such venture is acquired in the  ordinary  course of business and on
fair and reasonable  terms and (iii)such venture  interests acquired and capital
contributions  made  (valued as of the date such  interest  was  acquired or the
contribution  made) do not exceed,  in the aggregate at any time  outstanding an
amount equal to $10,000,000.

               (i) subject to the limits in Section 9.07, additional Investments
(including, without limitation, capital contributions) in the ventures described
or referred  to on Schedule  9.05(h)  and new  Investments  (including,  without
limitation, capital contributions) in ventures entered into by the Borrower or a
Material  Subsidiary  with others in the ordinary  course of business;  provided
that (i) any such venture is not engaged exclusively in oil and gas exploration,
development,   production,   processing   and  related   activities,   including
transportation, (ii) the  interest in such  venture is acquired in the  ordinary
course  of  business  and on fair and  reasonable  terms  and (iii) such  enture
interests  acquired and capital  contributions  made (valued as of the date such
interest was acquired or the contribution  made) do not exceed, in the aggregate
at any time outstanding an amount equal to $10,000,000.

               (j) subject to the limits in Section 9.07,  Investments in direct
ownership  interests in  additional  Oil and Gas  Properties  and gas  gathering
systems related thereto or related to farm-out,  farm-in, joint operating, joint
venture or area of mutual interest agreements,  gathering systems,  pipelines or
other  similar  arrangements  which are usual and  customary  in the oil and gas
exploration and production business located within the geographic  boundaries of
the United States of America.

               (k) the $72,000,000  loan (said principal amount being subject to
adjustment  [higher or lower]  pursuant  to the terms of the  Purchase  and Sale
Agreement)  to be  made  by the  Borrower  pursuant  to the  Purchase  and  Sale
Agreement.

               (l) so long as no Event of Default shall have  occurred  which is
continuing, from and after the date hereof, the Borrower may make repurchases of
its stock provided that the aggregate  amount paid by the Borrower in connection
with such repurchases shall not exceed $20,000,000.

         Section 9.06 Designation of Material Subsidiaries. Unless designated as
                      ------------------------------------
a Material  Subsidiary  on Schedule  7.15 as of the date  hereof or  thereafter,
assuming  compliance  with Section 9.06, any Person that becomes a Subsidiary of
the  Borrower  or any of its  Material  Subsidiaries  shall be  classified  as a
Material Subsidiary.

         Section 9.07 Nature of Business;  International Operations. Neither the
                      ---------------------------------------------
Borrower nor any Material  Subsidiary  will allow any material change to be made
in the character of its business as an independent  oil and gas  exploration and
production  company.  From and  after  the date  hereof,  the  Borrower  and its
Subsidiaries  will not  acquire  or make any  other  expenditure  (whether  such
expenditure  is capital,  operating or  otherwise) in or related to, any Oil and
Gas  Properties  not located  within the  geographical  boundaries of the United
States or Canada in excess of $10,000,000 in the aggregate.

         Section  9.08  Limitation  on  Leases.  Neither  the  Borrower  nor any
                        ----------------------
Material Subsidiary will create, incur, assume or suffer to exist any obligation

                                       67

for the  payment of rent or hire of  Property  of any kind  whatsoever  (real or
personal but  excluding  Capital  Leases and leases of  Hydrocarbon  Interests),
under leases or lease  agreements  which would cause the aggregate amount of all
payments made by the Borrower and the Material Subsidiaries pursuant to all such
leases or lease agreements, including, without limitation, any residual payments
at the  end of  any  lease,  to  exceed  $3,000,000  in  any  period  of  twelve
consecutive calendar months during the life of such leases.

         Section  9.09  Proceeds  of Notes.  The  Borrower  will not  permit the
                        ------------------
proceeds of the Notes to be used for any purpose  other than those  permitted by
Section  7.22.  Neither  the  Borrower  nor any  Person  acting on behalf of the
Borrower  has taken or will take any action  which  might  cause any of the Loan
Documents to violate  Regulations U or X or any other regulation of the Board or
to  violate  Section  7 of the  Securities  Exchange  Act of 1934 or any rule or
regulation  thereunder,  in  each  case  as now in  effect  or as the  same  may
hereinafter be in effect. If requested by the Administrative Agent, the Borrower
will  furnish to the  Administrative  Agent and each Lender a  statement  to the
foregoing  effect in  conformity  with the  requirements  of FR Form U-1 or such
other form referred to in Regulation U or Regulation X of the Board, as the case
may be.

         Section 9.10 ERISA  Compliance.  The Borrower and the Subsidiaries will
                      -----------------
not at any time:

               (a) engage in, or permit  any ERISA  Affiliate  to engage in, any
transaction  in connection  with which the  Borrower,  a Subsidiary or any ERISA
Affiliate  could be subjected  to either a civil  penalty  assessed  pursuant to
subsections  (c), (i) or (l) of section 502 of ERISA or a tax imposed by Chapter
43 of Subtitle D of the Code.

               (b) terminate,  or permit any ERISA  Affiliate to terminate,  any
Plan in a manner, or take any other action with respect to any Plan, which could
result in any liability of the Borrower,  a Subsidiary or any ERISA Affiliate to
the PBGC.

               (c) fail to make, or permit any ERISA  Affiliate to fail to make,
full payment when due of all amounts  which,  under the  provisions of any Plan,
agreement relating thereto or applicable law, the Borrower,  a Subsidiary or any
ERISA Affiliate is required to pay as contributions thereto.

               (d) permit to exist,  or allow any ERISA  Affiliate  to permit to
exist, any accumulated  funding  deficiency within the meaning of section 302 of
ERISA or section  412 of the Code,  whether or not waived,  with  respect to any
Plan.

               (e) permit, or allow any ERISA Affiliate to permit, the actuarial
present  value of the  benefit  liabilities  under  any Plan  maintained  by the
Borrower,  a Subsidiary or any ERISA Affiliate which is regulated under Title IV
of  ERISA  to  exceed  the  current  value  of the  assets  (computed  on a plan
termination  basis in accordance  with Title IV of ERISA) of such Plan allocable
to such benefit  liabilities.  The term "actuarial  present value of the benefit
liabilities" shall have the meaning specified in section 4041 of ERISA.

                                       68

               (f)  contribute to or assume an  obligation to contribute  to, or
permit  any  ERISA  Affiliate  to  contribute  to or  assume  an  obligation  to
contribute to, any Multiemployer Plan.

               (g)  acquire,  or  permit  any ERISA  Affiliate  to  acquire,  an
interest in any Person that causes such Person to become an ERISA Affiliate with
respect to the Borrower or a Subsidiary  or with respect to any ERISA  Affiliate
of  the  Borrower  or  a  Subsidiary  if  such  Person  sponsors,  maintains  or
contributes to, or at any time in the six-year period preceding such acquisition
has sponsored, maintained, or contributed to, (1) any Multiemployer Plan, or (2)
any other Plan that is subject to Title IV of ERISA  under  which the  actuarial
present  value of the benefit  liabilities  under such Plan  exceeds the current
value of the assets  (computed on a plan  termination  basis in accordance  with
Title IV of ERISA) of such Plan allocable to such benefit liabilities.

               (h) incur, or permit any ERISA Affiliate to incur, a liability to
or on account of a Plan under sections 515, 4062,  4063,  4064,  4201 or 4204 of
ERISA.

               (i)  contribute to or assume an  obligation to contribute  to, or
permit  any  ERISA  Affiliate  to  contribute  to or  assume  an  obligation  to
contribute to, any employee  welfare benefit plan, as defined in section 3(1) of
ERISA,  including,  without  limitation,  any such plan  maintained  to  provide
benefits to former  employees of such  entities,  that may not be  terminated by
such  entities  in their  sole  discretion  at any  time  without  any  material
liability.

               (j)  amend,  or permit  any  ERISA  Affiliate  to  amend,  a Plan
resulting  in an  increase  in  current  liability  such  that the  Borrower,  a
Subsidiary or any ERISA  Affiliate is required to provide  security to such Plan
under section 401(a)(29) of the Code.

         Section 9.11 Sale or Discount of  Receivables.  Except for  receivables
                      --------------------------------
obtained by the Borrower or any Material  Subsidiary out of the ordinary  course
of business or the settlement of joint interest billing accounts in the ordinary
course of  business  or  discounts  granted  to settle  collection  of  accounts
receivable or the sale of defaulted  accounts  arising in the ordinary course of
business in connection  with the  compromise  or  collection  thereof and not in
connection with any financing transaction, neither the Borrower nor any Material
Subsidiary  will  discount or sell (with or without  recourse)  any of its notes
receivable or accounts receivable.

         Section  9.12  Mergers,  Etc.  Neither the  Borrower  nor any  Material
                        -------------
Subsidiary  will merge into or with or  consolidate  with any other  Person,  or
sell,  lease or otherwise  dispose of (whether in one transaction or in a series
of transactions)  all or  substantially  all of its Property to any other Person
(any such transaction, a "consolidation"); provided that
                          -------------

               (a) the Borrower or any Material  Subsidiary may participate in a
consolidation with any other Person; provided that (i) no Default is continuing,
(ii) any such  consolidation  would not cause a  Default hereunder, (iii) if the
Borrower  consolidates  with any Person,  the  Borrower  shall be the  surviving
Person, (iv) if any Material Subsidiary consolidates with any Person (other than
the Borrower or a Material  Subsidiary) and such Material  Subsidiary is not the
surviving  Person,  such surviving  Person shall expressly assume in writing (in
form and substance  satisfactory to the Administrative Agent) all obligations of
such Material  Subsidiary  under the Loan  Documents and (v) the Borrowing  Base

                                       69

will be  redetermined  using the  procedures for an Interim  Redetermination  in
accordance with Section 2.07; and

               (b) any Material  Subsidiary may  participate in a  consolidation
with the  Borrower  (provided  that the  Borrower  shall  be the  continuing  or
surviving  corporation)  or any  other  Material  Subsidiary  and if one of such
Material  Subsidiaries is a Wholly-Owned  Subsidiary,  then the surviving Person
shall be a Wholly-Owned Subsidiary.

         Section 9.13 Sale of  Properties.  The Borrower  will not, and will not
                      -------------------
permit any Material Subsidiary to, sell, assign,  farm-out,  convey or otherwise
transfer any Property  except for (a) the sale of  Hydrocarbons  in the ordinary
course of business;  (b)  farmouts of  undeveloped  acreage and  assignments  in
connection with such farmouts;  (c) the sale or transfer of equipment that is no
longer necessary for the business of the Borrower or such Material Subsidiary or
is replaced by  equipment  of at least  comparable  value and use; (d) the sale,
transfer or other disposition of Equity Interests in non-Material  Subsidiaries;
sales or other dispositions of Oil and Gas Properties or any interest therein or
Material  Subsidiaries owning Oil and Gas Properties;  provided that (i) if such
sales or other  dispositions of Oil and Gas Properties or Material  Subsidiaries
owning Oil and Gas Properties  included in the most recently  delivered  Reserve
Report during any period between two successive Scheduled  Redetermination Dates
has a  fair  market  value  in  excess  of  $5,000,000,  individually  or in the
aggregate, the Borrowing Base shall be reduced,  effective immediately upon such
sale or  disposition,  by an amount equal to the value,  if any,  assigned  such
Property in the most recently  delivered Reserve Report and (ii)if any such sale
or other disposition is of a Material  Subsidiary owning Oil and Gas Properties,
such sale or other  disposition  shall include all the Equity  Interests of such
Material  Subsidiary;  and (iii)sales and other  dispositions of Properties  not
regulated  by Section  9.13(a) to (e) having a fair  market  value not to exceed
$5,000,000 during any 12-month period.

         Section  9.14  Environmental  Matters.  Neither  the  Borrower  nor any
                        ----------------------
Material  Subsidiary will cause or permit any of its Property to be in violation
of, or do  anything or permit  anything  to be done which will  subject any such
Property to any Remedial Work under any Environmental  Laws, assuming disclosure
to the applicable  Governmental Authority of all relevant facts,  conditions and
circumstances,  if any,  pertaining  to such Property  where such  violations or
remedial  obligations  could  reasonably be expected to have a Material  Adverse
Effect.

         Section 9.15 Transactions with Affiliates. Neither the Borrower nor any
                      ----------------------------
Material  Subsidiary  will  enter  into  any  transaction,   including,  without
limitation,  any purchase,  sale, lease or exchange of Property or the rendering
of any service,  with any Affiliate  (other than the Guarantors and Wholly-Owned
Subsidiaries of the Borrower) unless such  transactions are otherwise  permitted
under this Agreement and are upon fair and reasonable terms no less favorable to
it than it would obtain in a comparable  arm's length  transaction with a Person
not an Affiliate.

         Section 9.16 Subsidiaries. The Borrower shall not, and shall not permit
                      ------------
any Material Subsidiary to, create or acquire any additional Material Subsidiary
or redesignate a Subsidiary as a Material  Subsidiary  unless the Borrower gives
written notice to the  Administrative  Agent of such creation or acquisition and
complies with Section 8.14(b).  The Borrower shall not, and shall not permit any

                                       70

Material  Subsidiary  to,  sell,  assign  or  otherwise  dispose  of any  Equity
Interests in any Material Subsidiary except in compliance with Section 9.13(e).

         Section 9.17 Negative Pledge Agreements; Dividend Restrictions. Neither
                      -------------------------------------------------
the Borrower nor any Material Subsidiary will create, incur, assume or suffer to
exist any contract,  agreement or understanding (other than this Agreement,  the
Security  Instruments  or Capital  Leases  creating  Liens  permitted by Section
9.03(c))  which in any way  prohibits  or  restricts  the  granting,  conveying,
creation  or  imposition  of any  Lien on any of its  Property  in  favor of the
Administrative  Agent and the Lenders or restricts any Material  Subsidiary from
paying dividends or making  distributions  to the Borrower or any Guarantor,  or
which  requires  the  consent  of or  notice  to  other  Persons  in  connection
therewith.

         Section 9.18 Gas  Imbalances,  Take-or-Pay  or Other  Prepayments.  The
                      ----------------------------------------------------
Borrower will not allow (on a net basis) gas  imbalances,  take-or-pay  or other
prepayments  with respect to the Oil and Gas  Properties  of the Borrower or any
Material  Subsidiary that would require the Borrower or such Material Subsidiary
to deliver Hydrocarbons at some future time without then or thereafter receiving
full payment  therefor to exceed one and one-half million mcf of gas (on an mcfe
equivalent basis) in the aggregate.

         Section  9.19 Swap  Agreements.  Neither the  Borrower nor any Material
                       ----------------
Subsidiary  will enter into any Swap  Agreements  with any Person other than (a)
Swap Agreements in respect of commodities (i)with an Approved  Counterparty  and
(ii)the notional  volumes for which (when aggregated  with other  commodity Swap
Agreements then in effect) do not exceed,  as of the date such Swap Agreement is
executed,  75% of the reasonably  anticipated  projected production from proved,
developed,  producing  Oil and Gas  Properties  for each month during the period
during which such Swap Agreement is in effect, *b) Swap  Agreements  effectively
converting   interest   rates  from  floating  to  fixed  (i) with  an  Approved
Counterparty  and (ii)the notional  amounts of which (when aggregated with other
interest rate Swap Agreements  then in effect  effectively  converting  interest
rates from  floating  to fixed) do not exceed  100% of  principal  amount of the
Borrower's  floating rate Debt in respect of borrowed  money, (c)Swap Agreements
effectively  converting  interest  rates  from  fixed  to  floating  (i) with an
Approved  Counterparty  and (ii) the notional  amounts of which (when aggregated
with other interest rate Swap Agreements then in effect  effectively  converting
interest rates from fixed to floating) do not exceed 100% of principal amount of
the Borrower's fixed rate Debt in respect of borrowed money (including,  without
limitation,  the  Borrower's  5.75%  Senior  Convertible  Notes),  and  (d) Swap
Agreements in respect of currencies (i) with an Approved  Counterparty, (ii)such
transactions are to hedge actual or expected  fluctuations in currencies and are
not for speculative purposes and 3. such transactions do not involve termination
or expiry  dates  longer  than six (iii) months after the trade  date in respect
thereof. In no event shall any Swap Agreement contain any requirement, agreement
or covenant for the Borrower or any Material  Subsidiary  to post  collateral or
margin to secure their  obligations under such Swap Agreement or to cover market
exposures  other than usual and  customary  requirements  to deliver  letters of
credit or post cash collateral.

         Section 9.20 Preservation of Material Agreements. Except for acts which
                      -----------------------------------
could not reasonably be expected to have a Material  Adverse Effect or which are
taken in the ordinary course of business,  neither the Borrower nor any Material
Subsidiary,  as the  case may be,  will  agree to any  change,  modification  or
amendment to or waiver of any of the terms or  provisions of any of the Material

                                       71

Agreements.  Neither the Borrower nor any Material  Subsidiary,  as the case may
be,  will take any action or permit any action to be taken by others  which will
release any Person from its obligations or liabilities under any of the Material
Agreements.

         Section 9.21 Release of Liens.  The Borrower shall be entitled to cause
                      ----------------
Mortgaged  Properties  having  an  aggregate  fair  market  value  not to exceed
$10,000,000  to be released  from the Liens  created by and  existing  under the
Security  Instruments  without the consent of the Lenders;  provided that (a) no
                                                            -------- ----
Event of  Default  shall have  occurred  which is  continuing,  (b)only one such
release may be made between Schedule Redeterminations of the Borrowing Base, (c)
following any such release,  the total value of the remaining Mortgaged Property
shall be sufficient  to support the Aggregate  Commitment in the sole opinion of
the Administrative Agent, and (d) following any such release, the Administrative
Agent shall  adjust the then  current  Borrowing  Base to take into  account the
release of such Mortgaged  Properties and any mandatory prepayment required as a
result thereof shall be made at the time of such release.

                                    ARTICLE X
                           Events of Default; Remedies

         Section 10.01 Events of Default.  One or more of the  following  events
                       -----------------
shall constitute an "Event of Default":
                     ----------------

               (a) the Borrower  shall fail to pay any  principal of any Loan or
any  reimbursement  obligation in respect of any LC Disbursement when and as the
same shall become due and payable,  whether at the due date thereof or at a date
fixed for prepayment thereof or otherwise.

               (b) the  Borrower  shall fail to pay any  interest on any Loan or
any fee or any  other  amount  (other  than an  amount  referred  to in  Section
10.01(a)) payable under any Loan Document, when and as the same shall become due
and payable,  and such failure shall  continue  unremedied for a period of three
Business Days.

               (c) any  representation  or warranty made or deemed made by or on
behalf of the Borrower or any Material  Subsidiary in or in connection  with any
Loan  Document or any amendment or  modification  of any Loan Document or waiver
under such Loan Document, or in any report, certificate,  financial statement or
other document  furnished pursuant to or in connection with any Loan Document or
any amendment or modification thereof or waiver thereunder,  shall prove to have
been incorrect in any respect material to the Borrower's  creditworthiness or to
the rights or interests of the Lenders when made or deemed made.

               (d) the Borrower or any Material Subsidiary shall fail to observe
or perform any covenant,  condition or agreement contained in Section 8.03 or in
ARTICLE IX.

               (e) the Borrower or any Material Subsidiary shall fail to observe
or perform any  covenant,  condition  or agreement  contained in this  Agreement
(other than those  specified in Section  10.01(a),  Section  10.01(b) or Section
10.01(d)) or any other Loan Document, and such failure shall continue unremedied
for a period of 30 days after the earlier to occur of (A)  notice  thereof  from
the  Administrative  Agent to the  Borrower  (which  notice will be given at the

                                       72

request of any  Lender) or (B) a  Responsible  Officer of the  Borrower  or such
Material Subsidiary otherwise becoming aware of such default.

               (f) the  Borrower or any Material  Subsidiary  shall fail to make
any payment  (whether of  principal  or interest  and  regardless  of amount) in
respect of any Material Indebtedness,  when and as the same shall become due and
payable  (subject to  applicable  grace  periods),  unless such payment is being
contested in good faith and by proper  proceedings  and against  which  adequate
reserves are being maintained.

               (g) any event or  condition  occurs that  results in any Material
Indebtedness  becoming  due prior to its  scheduled  maturity or that enables or
permits  (with or without  the giving of notice,  the lapse of time or both) the
holder or holders of any Material Indebtedness or any trustee or agent on its or
their behalf to cause any Material Indebtedness to become due, or to require the
Redemption  thereof or any offer to Redeem to be made in respect thereof,  prior
to its scheduled maturity or require the Borrower or any Material  Subsidiary to
make an offer in respect thereof.

               (h)  an   involuntary   proceeding   shall  be  commenced  or  an
involuntary  petition shall be filed seeking (i) liquidation,  reorganization or
other relief in respect of the Borrower or any Material Subsidiary or its debts,
or of a  substantial  part of its assets,  under any  Federal,  state or foreign
bankruptcy,  insolvency,  receivership or similar law now or hereafter in effect
or  (ii)  the  appointment  of a  receiver,  trustee,  custodian,  sequestrator,
conservator or similar  official for the Borrower or any Material  Subsidiary or
for a substantial part of its assets,  and, in any such case, such proceeding or
petition shall continue  undismissed for 30 days or an order or decree approving
or ordering any of the foregoing shall be entered.

               (i) the Borrower or any Material Subsidiary shall (i) voluntarily
commence any proceeding or file any petition seeking liquidation, reorganization
or other  relief  under any Federal,  state or foreign  bankruptcy,  insolvency,
receivership  or similar law now or  hereafter  in effect,  (ii)  consent to the
institution  of, or fail to  contest  in a timely and  appropriate  manner,  any
proceeding or petition described in Section 10.01(h), (iii) apply for or consent
to the appointment of a receiver, trustee, custodian, sequestrator,  conservator
or  similar  official  for the  Borrower  or any  Material  Subsidiary  or for a
substantial  part of its  assets,  (iv) file an answer  admitting  the  material
allegations  of a petition filed against it in any such  proceeding,  (v) make a
general  assignment for the benefit of creditors or (vi) take any action for the
purpose of effecting any of the foregoing.

               (j) the Borrower or any Material  Subsidiary shall become unable,
admit in writing its inability or fail generally to pay its debts as they become
due.

               (k)  one or  more  judgments  for  the  payment  of  money  in an
aggregate  amount  in  excess  of  $1,000,000  (to the  extent  not  covered  by
independent  third party  insurance  provided by insurers of the highest  claims
paying  rating or  financial  strength as to which the insurer  does not dispute
coverage  and is not  subject to an  insolvency  proceeding)  shall be  rendered
against the Borrower, any Material Subsidiary or any combination thereof and the
same shall remain  undischarged for a period of 30 consecutive days during which
execution shall not be effectively  stayed, or any action shall be legally taken

                                       73

by a judgment  creditor to attach or levy upon any assets of the Borrower or any
Material Subsidiary to enforce any such judgment.

               (l) the Loan  Documents  after  delivery  thereof  shall  for any
reason, except to the extent permitted by the terms thereof, cease to be in full
force and effect and valid,  binding and  enforceable  in accordance  with their
terms against the Borrower or a Guarantor  party  thereto,  or cease to create a
valid  and  perfected  Lien  of  the  priority  required  thereby  on any of the
collateral  purported to be covered  thereby,  except to the extent permitted by
the terms of this  Agreement,  or the Borrower or any  Guarantor or any of their
Affiliates shall so state in writing.

               (m) an ERISA Event shall have  occurred  that,  in the opinion of
the Majority Lenders,  when taken together with all other ERISA Events that have
occurred, could reasonably be expected to result in a Material Adverse Effect.

               (n) a Change in Control shall occur.

               (o) the Borrower  shall fail to pay any  mandatory  prepayment or
provide additional collateral as provided in Section 3.04(c)

         Section 10.02 Remedies.
                       --------

               (a) In the case of an Event of Default  other than one  described
in  Section  10.01(h),  Section  10.01(i)  or  Section  10.01(j),  at  any  time
thereafter during the continuance of such Event of Default,  the  Administrative
Agent may, and at the request of the Majority  Lenders,  shall, by notice to the
Borrower, take either or both of the following actions, at the same or different
times:  (i) terminate the  Commitments,  and  thereupon  the  Commitments  shall
terminate immediately, and (ii) declare the Notes and the Loans then outstanding
to be due and payable in whole (or in part,  in which case any  principal not so
declared  to be due  and  payable  may  thereafter  be  declared  to be due  and
payable),  and  thereupon  the  principal of the Loans so declared to be due and
payable,  together  with  accrued  interest  thereon  and  all  fees  and  other
obligations of the Borrower and the Guarantors  accrued  hereunder and under the
Notes and the other Loan Documents (including,  without limitation,  the payment
of cash  collateral  to secure the LC Exposure as provided in Section  2.08(j)),
shall become due and payable immediately,  without presentment,  demand, protest
or other notice of any kind,  all of which are hereby waived by the Borrower and
each  Guarantor;  and in  case of an  Event  of  Default  described  in  Section
10.01(h),   Section  10.01(i)  or  Section   10.01(j),   the  Commitments  shall
automatically  terminate  and the Notes  and the  principal  of the  Loans  then
outstanding,  together with accrued  interest thereon and all fees and the other
obligations of the Borrower and the Guarantors  accrued  hereunder and under the
Notes and the other Loan Documents (including,  without limitation,  the payment
of cash  collateral  to secure the LC Exposure as provided in Section  2.08(j)),
shall automatically become due and payable, without presentment, demand, protest
or other notice of any kind,  all of which are hereby waived by the Borrower and
each Guarantor.

               (b) In the case of the  occurrence  of an Event of  Default,  the
Administrative  Agent and the Lenders  will have all other  rights and  remedies
available at law and equity.

               (c)  All  proceeds   realized  from  the   liquidation  or  other
disposition  of collateral or otherwise  received  after  maturity of the Notes,
whether by acceleration or otherwise,  shall be applied: first, to reimbursement

                                       74

of expenses  and  indemnities  provided for in this  Agreement  and the Security
Instruments;  second, to accrued interest on the Notes;  third, to fees; fourth,
pari passu to (i)  Indebtedness  owing to a Lender or an  Affiliate  of a Lender
under  any Swap  Agreement  permitted  hereby  and  (ii)  pro rata to  principal
outstanding on the Notes; fifth, to any other  Indebtedness;  sixth, to serve as
cash  collateral  to be  held  by the  Administrative  Agent  to  secure  the LC
Exposure;  and any excess shall be paid to the Borrower or as otherwise required
by any Governmental Requirement.

                                   ARTICLE XI
                            The Administrative Agent

         Section 11.01 Appointment;  Powers. Each of the Lenders and the Issuing
                       --------------------
Bank  hereby  irrevocably  appoints  the  Administrative  Agent as its agent and
authorizes  the  Administrative  Agent to take such actions on its behalf and to
exercise such powers as are delegated to the  Administrative  Agent by the terms
hereof and the other Loan  Documents,  together  with such actions and powers as
are reasonably incidental thereto.

         Section  11.02 Duties and  Obligations  of  Administrative  Agent.  The
                        --------------------------------------------------
Administrative  Agent  shall not have any  duties or  obligations  except  those
expressly set forth in the Loan  Documents.  Without  limiting the generality of
the  foregoing,  (a)  the  Administrative  Agent  shall  not be  subject  to any
fiduciary or other implied duties,  regardless of whether a Default has occurred
and is continuing,  (b) the Administrative Agent shall not have any duty to take
any  discretionary  action  or  exercise  any  discretionary  powers,  except as
provided in Section  11.03,  and (c)except as expressly  set forth herein,  the
Administrative  Agent  shall  not have any duty to  disclose,  and  shall not be
liable for the failure to disclose,  any information relating to the Borrower or
any of its Subsidiaries  that is communicated to or obtained by the bank serving
as  Administrative  Agent  or  any  of  its  Affiliates  in  any  capacity.  The
Administrative Agent shall be deemed not to have knowledge of any Default unless
and until written  notice  thereof is given to the  Administrative  Agent by the
Borrower  or a  Lender,  and shall  not be  responsible  for or have any duty to
ascertain or inquire into (i) any statement,  warranty or representation made in
or in  connection  with this  Agreement  or any other  Loan  Document,  (ii) the
contents of any  certificate,  report or other document  delivered  hereunder or
under any other Loan  Document or in connection herewith or therewith, (iii) the
performance or observance of any of the covenants,  agreements or other terms or
conditions  set forth herein or in any other Loan  Document, (iv) the  validity,
enforceability,  effectiveness or genuineness of this Agreement,  any other Loan
Document or any other agreement, instrument or document, (v) the satisfaction of
any condition set forth in ARTICLE VI or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent,
(vi) the existence,  value, perfection or priority of any collateral security or
the  financial or other  condition of the Borrower and its  Subsidiaries  or any
other  obligor or  guarantor,  or (vii)any  failure by the Borrower or any other
Person (other than itself) to perform any of its obligations  hereunder or under
any other Loan  Document or the  performance  or  observance  of any  covenants,
agreements or other terms or conditions set forth herein or therein.

         Section 11.03 Action by Administrative  Agent. The Administrative Agent
                       -------------------------------
shall  not have  any  duty to take any  discretionary  action  or  exercise  any
discretionary   powers,   except   discretionary  rights  and  powers  expressly
contemplated  hereby  that the  Administrative  Agent is required to exercise in

                                       75

writing as directed by the Majority  Lenders (or such other number or percentage
of the  Lenders as shall be  necessary  under the  circumstances  as provided in
Section  12.02)  and in all  cases  the  Administrative  Agent  shall  be  fully
justified  in  failing  or  refusing  to act  hereunder  or under any other Loan
Documents  unless it shall (a) receive  written  instructions  from the Majority
Lenders or the Lenders,  as  applicable,  (or such other number or percentage of
the Lenders as shall be necessary under the circumstances as provided in Section
12.02)  specifying  the  action  to be  taken  and  (b)  be  indemnified  to its
satisfaction by the Lenders against any and all liability and expenses which may
be incurred by it by reason of taking or continuing to take any such action. The
instructions  as  aforesaid  and any action  taken or  failure  to act  pursuant
thereto by the Administrative Agent shall be binding on all of the Lenders. If a
Default has occurred and is continuing, then the Administrative Agent shall take
such action with respect to such  Default as shall be directed by the  requisite
Lenders in the written instructions (with indemnities) described in this Section
11.03,  provided  that,  unless and until the  Administrative  Agent  shall have
received  such  directions,  the  Administrative  Agent  may (but  shall  not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interests of the Lenders.
In no event,  however,  shall the  Administrative  Agent be required to take any
action which exposes the Administrative  Agent to personal liability or which is
contrary  to  this  Agreement,   the  Loan  Documents  or  applicable  law.  The
Administrative Agent shall not be liable for any action taken or not taken by it
with the  consent or at the request of the  Majority  Lenders or the Lenders (or
such other number or percentage  of the Lenders as shall be necessary  under the
circumstances  as provided in Section 12.02),  and otherwise shall not be liable
for any  action  taken or not taken by it  hereunder  or under  any  other  Loan
Document or under any other  document or instrument  referred to or provided for
herein or therein or in  connection  herewith  or  therewith  INCLUDING  ITS OWN
ORDINARY NEGLIGENCE, except for its own gross negligence or willful misconduct.

         Section 11.04  Reliance by  Administrative  Agent.  The  Administrative
                        ----------------------------------
Agent  shall be  entitled to rely upon,  and shall not incur any  liability  for
relying upon, any notice, request, certificate,  consent, statement, instrument,
document or other  writing  believed by it to be genuine and to have been signed
or sent by the proper Person.  The  Administrative  Agent also may rely upon any
statement made to it orally or by telephone and believed by it to be made by the
proper Person, and shall not incur any liability for relying thereon and each of
the  Borrower,  the  Lenders and the  Issuing  Bank  hereby  waives the right to
dispute the Administrative Agent's record of such statement,  except in the case
of gross  negligence or willful  misconduct  by the  Administrative  Agent.  The
Administrative  Agent may consult with legal counsel (who may be counsel for the
Borrower),  independent  accountants and other experts selected by it, and shall
not be liable for any  action  taken or not taken by it in  accordance  with the
advice of any such counsel, accountants or experts. The Administrative Agent may
deem and treat  the payee of any Note as the  holder  thereof  for all  purposes
hereof unless and until a written notice of the  assignment or transfer  thereof
permitted hereunder shall have been filed with the Administrative Agent.

         Section 11.05 Subagents.  The Administrative  Agent may perform any and
                       ---------
all its duties and  exercise its rights and powers by or through any one or more
sub-agents  appointed by the Administrative  Agent. The Administrative Agent and
any such  sub-agent  may perform any and all its duties and  exercise its rights
and powers through their respective Related Parties. The exculpatory  provisions
of the preceding  Sections of this ARTICLE XI shall apply to any such  sub-agent

                                       76

and to the Related Parties of the  Administrative  Agent and any such sub-agent,
and  shall  apply  to  their  respective   activities  in  connection  with  the
syndication of the credit  facilities  provided for herein as well as activities
as Administrative Agent.

         Section 11.06 Resignation or Removal of Administrative  Agent.  Subject
                       -----------------------------------------------
to the  appointment  and  acceptance  of a  successor  Administrative  Agent  as
provided in this Section 11.06, the Administrative  Agent may resign at any time
by  notifying  the  Lenders,  the  Issuing  Bank  and  the  Borrower,   and  the
Administrative  Agent may be removed  at any time with or  without  cause by the
Majority  Lenders.  Upon any such  resignation or removal,  the Majority Lenders
shall have the right, in consultation with the Borrower, to appoint a successor.
If no successor  shall have been so appointed by the Majority  Lenders and shall
have accepted such appointment within 30 days after the retiring  Administrative
Agent gives notice of its resignation or removal of the retiring  Administrative
Agent, then the retiring  Administrative Agent may, on behalf of the Lenders and
the Issuing Bank, appoint a successor Administrative Agent which shall be a bank
with an office in New York, New York, or an Affiliate of any such bank. Upon the
acceptance of its appointment as Administrative  Agent hereunder by a successor,
such successor  shall succeed to and become vested with all the rights,  powers,
privileges  and duties of the retiring  Administrative  Agent,  and the retiring
Administrative  Agent  shall be  discharged  from  its  duties  and  obligations
hereunder.  The fees payable by the Borrower to a successor Administrative Agent
shall be the same as those payable to its predecessor  unless  otherwise  agreed
between  the  Borrower  and such  successor.  After the  Administrative  Agent's
resignation hereunder, the provisions of this ARTICLE XI and Section 12.03 shall
continue in effect for the benefit of such retiring  Administrative  Agent,  its
sub-agents and their respective  Related Parties in respect of any actions taken
or  omitted  to be taken by any of them  while it was  acting as  Administrative
Agent.

         Section 11.07  Administrative  Agent as Lenders.  Wachovia,  serving as
                        --------------------------------
Administrative  Agent  hereunder  shall  have the same  rights and powers in its
capacity as a Lender as any other  Lender and may exercise the same as though it
were not  Administrative  Agent,  and such bank and its  Affiliates  may  accept
deposits from,  lend money to and generally  engage in any kind of business with
the  Borrower or any  Subsidiary  or other  Affiliate  thereof as if it were not
Administrative Agent hereunder.

         Section  11.08  No  Reliance.  Each  Lender  acknowledges  that it has,
                         ------------
independently  and without reliance upon the  Administrative  Agent or any other
Lender and based on such documents and information as it has deemed appropriate,
made its own credit  analysis and decision to enter into this Agreement and each
other Loan Document to which it is a party.  Each Lender also  acknowledges that
it will, independently and without reliance upon the Administrative Agent or any
other Lender and based on such  documents and  information as it shall from time
to time deem  appropriate,  continue to make its own  decisions in taking or not
taking action under or based upon this Agreement,  any other Loan Document,  any
related  agreement  or any  document  furnished  hereunder  or  thereunder.  The
Administrative  Agent shall not be  required  to keep itself  informed as to the
performance  or  observance by the Borrower or any of its  Subsidiaries  of this
Agreement,  the Loan Documents or any other document referred to or provided for
herein  or  to  inspect  the   Properties  or  books  of  the  Borrower  or  its
Subsidiaries.  Except for notices,  reports and other  documents and information
expressly  required to be furnished to the Lenders by the  Administrative  Agent
hereunder  or  Arranger  shall have any duty or  responsibility  to provide  any

                                       77

Lender with any credit or other  information  concerning the affairs,  financial
condition or business of the Borrower (or any of its Affiliates)  which may come
into the possession of the  Administrative  Agent or any of its  Affiliates.  In
this regard,  each Lender acknowledges that Vinson & Elkins L.L.P. is acting
in this transaction as special counsel to the Administrative  Agent only, except
to the  extent  otherwise  expressly  stated  in any legal  opinion  or any Loan
Document. Each other party hereto will consult with its own legal counsel to the
extent that it deems  necessary in  connection  with the Loan  Documents and the
matters contemplated therein.

         Section 11.09 Authority of Administrative  Agent to Release  Collateral
                       ---------------------------------------------------------
and Liens. Each Lender and the Issuing Bank hereby authorizes the Administrative
- ---------
Agent  to  release  any  collateral  that is  permitted  to be sold or  released
pursuant to the terms of the Loan  Documents.  Each Lender and the Issuing  Bank
hereby  authorizes  the  Administrative  Agent to  execute  and  deliver  to the
Borrower,  at the  Borrower's  sole cost and  expense,  any and all  releases of
Liens,  termination  statements,   assignments  or  other  documents  reasonably
requested by the Borrower in connection  with any sale or other  disposition  of
Property to the extent such sale or other  disposition is permitted by the terms
of Section 9.13 or is otherwise authorized by the terms of the Loan Documents.

                                   ARTICLE XII
                                  Miscellaneous

         Section 12.01 Notices.
                       -------

               (a)  Except  in the  case of  notices  and  other  communications
expressly  permitted to be given by telephone (and subject to Section 12.01(b)),
all notices and other communications provided for herein shall be in writing and
shall be delivered by hand or overnight courier service,  mailed by certified or
registered mail or sent by telecopy, as follows:

                    (i) if to the Borrower,  to it at 1776 Lincoln Street, Suite
          700, Denver,  Colorado 80203, Attention of Richard C. Norris (Telecopy
          No. 303/861-0934);

                    (ii)  if to the  Administrative  Agent,  to it at 201  South
          College Street,  8th Floor NC 0680,  Charlotte,  North Carolina 28288,
          Attention of Rufus Kearney (Telecopy No. 704/383-0288), with a copy to
          Wachovia  Securities,  at 1001  Fannin,  Suite  2255,  Houston,  Texas
          77002-6709, Attention of Jay Chernosky (Telecopy No. 713/650-6354);

                    (iii) if to the  Issuing  Bank,  to it at 201 South  College
          Street, 8th Floor NC 0680, Charlotte,  North Carolina 28288, Attention
          of Rufus Kearney (Telecopy No. 704/383-0288); and

                    (iv)  if to  any  other  Lender,  to it at its  address  (or
          telecopy number) set forth in its Administrative Questionnaire.

               (b) Notices and other communications to the Lenders hereunder may
be delivered or furnished by  electronic  communications  pursuant to procedures
approved by the  Administrative  Agent;  provided that the  foregoing  shall not
apply to notices  pursuant to ARTICLE II, ARTICLE III,  ARTICLE IV and ARTICLE V
unless otherwise agreed by the  Administrative  Agent and the applicable Lender.

                                       78

The Administrative Agent or the Borrower may, in its discretion, agree to accept
notices and other  communications  to it hereunder by electronic  communications
pursuant to procedures approved by it; provided that approval of such procedures
may be limited to particular notices or communications.

               (c) Any party  hereto may change its address or  telecopy  number
for notices and other  communications  hereunder by notice to the other  parties
hereto.  All  notices  and other  communications  given to any  party  hereto in
accordance  with the provisions of this  Agreement  shall be deemed to have been
given on the date of receipt.

         Section 12.02 Waivers; Amendments.
                       -------------------

               (a) No  failure  on the  part of the  Administrative  Agent,  the
Issuing Bank or any Lender to exercise and no delay in exercising, and no course
of dealing with respect to, any right, power or privilege, or any abandonment or
discontinuance of steps to enforce such right, power or privilege,  under any of
the Loan Documents  shall operate as a waiver  thereof,  nor shall any single or
partial  exercise  of any  right,  power  or  privilege  under  any of the  Loan
Documents  preclude any other or further exercise thereof or the exercise of any
other right,  power or privilege.  The rights and remedies of the Administrative
Agent,  the  Issuing  Bank and the  Lenders  hereunder  and under the other Loan
Documents  are  cumulative  and are not exclusive of any rights or remedies that
they would  otherwise  have. No waiver of any provision of this Agreement or any
other Loan Document or consent to any departure by the Borrower  therefrom shall
in any  event be  effective  unless  the  same  shall be  permitted  by  Section
12.02(b),  and then  such  waiver  or  consent  shall be  effective  only in the
specific  instance  and for the purpose for which  given.  Without  limiting the
generality  of the  foregoing,  the making of a Loan or  issuance of a Letter of
Credit shall not be construed as a waiver of any Default,  regardless of whether
the Administrative  Agent, any Lender or the Issuing Bank may have had notice or
knowledge of such Default at the time.

               (b)  Neither  this  Agreement  nor any  provision  hereof nor any
Security Instrument nor any provision thereof may be waived, amended or modified
except  pursuant to an agreement or  agreements  in writing  entered into by the
Borrower  and the Majority  Lenders or by the  Borrower  and the  Administrative
Agent with the consent of the Majority Lenders;  provided that no such agreement
shall (i)  increase the  Commitment  or the Maximum  Credit Amount of any Lender
without the written  consent of such Lender, (ii) increase the Borrowing Base or
modify  Section  2.07, without the written  consent of all of the Lenders, (iii)
reduce the principal amount of any Loan or LC Disbursement or reduce the rate of
interest  thereon,  or reduce any fees  payable  hereunder,  or reduce any other
Indebtedness  hereunder  or under any other Loan  Document,  without the written
consent of each Lender  affected  thereby,  (iv) postpone the scheduled  date of
payment of the principal amount of any Loan or LC Disbursement,  or any interest
thereon, or any fees payable hereunder,  or any other Indebtedness  hereunder or
under any other Loan Document, or reduce the amount of, waive or excuse any such
payment,  or postpone or extend the Termination Date without the written consent
of each Lender affected  thereby,  (v) change Section 4.01(b) or Section 4.01(c)
in a manner that would alter the pro rata sharing of payments  required thereby,
without the written  consent of each Lender,  (vi) change the  definition of the
term  "Material  Subsidiary",  without the written consent of each Lender, (vii)
release any Guarantor (except as set forth in the Guaranty  Agreement),  release

                                       79

all or substantially  all of the collateral,  or reduce the percentage set forth
in Section 8.14 to less than 75%, without the written consent of each Lender, or
(viii)change any of the provisions of this Section 12.02(b) or the definition of
"Majority  Lenders"  or any other  provision  hereof  specifying  the  number or
percentage of Lenders required to waive, amend or modify any rights hereunder or
under any other Loan  Documents or make any  determination  or grant any consent
hereunder  or any other Loan  Documents,  without  the  written  consent of each
Lender; provided further that no such agreement shall amend, modify or otherwise
affect  the rights or duties of the  Administrative  Agent or the  Issuing  Bank
hereunder or under any other Loan Document  without the prior written consent of
the   Administrative   Agent  or  the  Issuing   Bank,   as  the  case  may  be.
Notwithstanding  the foregoing,  any supplement to Schedule 7.15  (Subsidiaries)
shall  be  effective  simply  by  delivering  to  the  Administrative   Agent  a
supplemental   schedule   clearly   marked  as  such  and,  upon  receipt,   the
Administrative Agent will promptly deliver a copy thereof to the Lenders.

         Section 12.03 Expenses, Indemnity; Damage Waiver.
                       ----------------------------------

               (a) The  Borrower  shall  pay (i)  all  reasonable  out-of-pocket
expenses  incurred by the  Administrative  Agent and its Affiliates,  including,
without  limitation,  the reasonable fees,  charges and disbursements of counsel
and other outside  consultants  for the  Administrative  Agent,  the  reasonable
travel, photocopy,  mailing, courier,  telephone and other similar expenses, and
the cost of environmental audits and surveys and appraisals,  in connection with
the syndication of the credit facilities  provided for herein,  the preparation,
negotiation,  execution,  delivery and administration (both before and after the
execution hereof and including advice of counsel to the Administrative  Agent as
to the  rights  and  duties of the  Administrative  Agent and the  Lenders  with
respect  thereto)  of  this  Agreement  and the  other  Loan  Documents  and any
amendments,  modifications  or waivers of or consents  related to the provisions
hereof  or  thereof  (whether  or not the  transactions  contemplated  hereby or
thereby shall be consummated), (ii) all costs, expenses,  Taxes, assessments and
other charges incurred by the  Administrative  Agent or any Lender in connection
with any filing, registration,  recording or perfection of any security interest
contemplated by this Agreement or any Security  Instrument or any other document
referred to therein, (iii) all reasonable out-of-pocket expenses incurred by the
Issuing Bank in connection with the issuance, amendment, renewal or extension of
any Letter of Credit or any demand for payment thereunder, (iv)all out-of-pocket
expenses incurred by the  Administrative  Agent, the Issuing Bank or any Lender,
including the reasonable fees,  charges and disbursements of any counsel for the
Administrative  Agent,  the Issuing Bank or any Lender,  in connection  with the
enforcement or protection of its rights in connection with this Agreement or any
other Loan  Document,  including  its rights  under this  Section  12.03,  or in
connection with the Loans made or Letters of Credit issued hereunder, including,
without limitation, all such out-of-pocket expenses incurred during any workout,
restructuring or negotiations in respect of such Loans or Letters of Credit.

               (b) THE BORROWER SHALL INDEMNIFY THE  ADMINISTRATIVE  AGENT,  THE
ISSUING BANK AND EACH LENDER,  AND EACH  RELATED  PARTY OF ANY OF THE  FOREGOING
PERSONS (EACH SUCH PERSON BEING CALLED AN "INDEMNITEE")  AGAINST,  AND HOLD EACH
                                           ----------
INDEMNITEE HARMLESS FROM, ANY AND ALL LOSSES, CLAIMS,  DAMAGES,  LIABILITIES AND
RELATED  EXPENSES,  INCLUDING THE REASONABLE FEES,  CHARGES AND DISBURSEMENTS OF
ANY COUNSEL FOR ANY INDEMNITEE,  INCURRED BY OR ASSERTED  AGAINST ANY INDEMNITEE

                                       80

DIRECTLY ARISING OUT OF, DIRECTLY IN CONNECTION WITH, OR DIRECTLY AS A RESULT OF
(i) THE  EXECUTION OR DELIVERY OF THIS  AGREEMENT OR ANY OTHER LOAN  DOCUMENT OR
ANY AGREEMENT OR INSTRUMENT  CONTEMPLATED HEREBY OR THEREBY,  THE PERFORMANCE BY
THE PARTIES HERETO OR THE PARTIES TO ANY OTHER LOAN DOCUMENT OF THEIR RESPECTIVE
OBLIGATIONS  HEREUNDER OR THEREUNDER  OR THE  CONSUMMATION  OF THE  TRANSACTIONS
CONTEMPLATED  HEREBY OR BY ANY OTHER  LOAN  DOCUMENT,  (ii) THE  FAILURE  OF THE
BORROWER  OR ANY  RESTRICTED  SUBSIDIARY  TO  COMPLY  WITH THE TERMS OF ANY LOAN
DOCUMENT, INCLUDING THIS AGREEMENT, OR WITH ANY GOVERNMENTAL  REQUIREMENT, (iii)
ANY INACCURACY OF ANY  REPRESENTATION  OR ANY BREACH OF ANY WARRANTY OR COVENANT
OF THE BORROWER OR ANY GUARANTOR  SET FORTH IN ANY OF THE LOAN  DOCUMENTS OR ANY
INSTRUMENTS, DOCUMENTS OR CERTIFICATIONS DELIVERED IN CONNECTION THEREWITH, (iv)
ANY LOAN OR LETTER OF CREDIT OR THE USE OF THE  PROCEEDS  THEREFROM,  INCLUDING,
WITHOUT  LIMITATION,  (A) ANY REFUSAL BY THE ISSUING  BANK TO HONOR A DEMAND FOR
PAYMENT UNDER A LETTER OF CREDIT IF THE DOCUMENTS  PRESENTED IN CONNECTION  WITH
SUCH DEMAND DO NOT STRICTLY  COMPLY WITH THE TERMS OF SUCH LETTER OF CREDIT,  OR
(B) THE  PAYMENT OF A DRAWING  UNDER ANY  LETTER OF CREDIT  NOTWITHSTANDING  THE
NON-COMPLIANCE,  NON-DELIVERY  OR OTHER IMPROPER  PRESENTATION  OF THE DOCUMENTS
PRESENTED IN CONNECTION  THEREWITH,  (v) ANY OTHER ASPECT OF THE LOAN DOCUMENTS,
(vi)THE OPERATIONS OF THE BUSINESS OF THE BORROWER AND ITS  SUBSIDIARIES  BY THE
BORROWER  AND ITS  SUBSIDIARIES, (vii) ANY  ASSERTION THAT THE LENDERS  WERE NOT
ENTITLED TO RECEIVE THE PROCEEDS RECEIVED PURSUANT TO THE SECURITY  INSTRUMENTS,
(viii) ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER OR ANY SUBSIDIARY OR ANY
OF THEIR  PROPERTIES,  INCLUDING  WITHOUT  LIMITATION, THE PRESENCE, GENERATION,
STORAGE, RELEASE, THREATENED RELEASE, USE, TRANSPORT,  DISPOSAL,  ARRANGEMENT OF
DISPOSAL OR  TREATMENT  OF OIL,  OIL AND GAS WASTES,  SOLID  WASTES OR HAZARDOUS
SUBSTANCES ON ANY OF THEIR  PROPERTIES, (ix) THE BREACH OR NON-COMPLIANCE BY THE
BORROWER OR ANY SUBSIDIARY WITH ANY ENVIRONMENTAL LAW APPLICABLE TO THE BORROWER
OR ANY  SUBSIDIARY,  (x) THE PAST OWNERSHIP BY THE BORROWER OR ANY SUBSIDIARY OF
ANY OF THEIR  PROPERTIES  OR PAST  ACTIVITY  ON ANY OF THEIR  PROPERTIES  WHICH,
THOUGH  LAWFUL  AND FULLY  PERMISSIBLE  AT THE  TIME,  COULD  RESULT IN  PRESENT
LIABILITY,  (xi) THE  PRESENCE,  USE,  RELEASE,  STORAGE,  TREATMENT,  DISPOSAL,
GENERATION,   THREATENED  RELEASE,  TRANSPORT,   ARRANGEMENT  FOR  TRANSPORT  OR
ARRANGEMENT  FOR DISPOSAL OF OIL, OIL AND GAS WASTES,  SOLID WASTES OR HAZARDOUS
SUBSTANCES ON OR AT ANY OF THE  PROPERTIES  OWNED OR OPERATED BY THE BORROWER OR
ANY  SUBSIDIARY  OR ANY ACTUAL OR  ALLEGED  PRESENCE  OR  RELEASE  OF  HAZARDOUS
MATERIALS  ON OR FROM ANY  PROPERTY  OWNED OR OPERATED BY THE BORROWER OR ANY OF
ITS  SUBSIDIARIES, (xii) ANY  ENVIRONMENTAL LIABILITY  RELATED IN ANY WAY TO THE

                                       81

BORROWER OR ANY OF ITS SUBSIDIARIES, OR (xii) ANY OTHER ENVIRONMENTAL, HEALTH OR
SAFETY  CONDITION IN CONNECTION WITH THE LOAN  DOCUMENTS, OR (xiv) ANY ACTUAL OR
PROSPECTIVE CLAIM,  LITIGATION,  INVESTIGATION OR PROCEEDING  RELATING TO ANY OF
THE  FOREGOING,  WHETHER  BASED  ON  CONTRACT,  TORT  OR ANY  OTHER  THEORY  AND
REGARDLESS OF WHETHER ANY  INDEMNITEE  IS A PARTY  THERETO,  AND SUCH  INDEMNITY
SHALL  EXTEND  TO  EACH  INDEMNITEE   NOTWITHSTANDING  THE  SOLE  OR  CONCURRENT
NEGLIGENCE  OF EVERY KIND OR CHARACTER  WHATSOEVER,  WHETHER  ACTIVE OR PASSIVE,
WHETHER AN AFFIRMATIVE ACT OR AN OMISSION,  INCLUDING  WITHOUT  LIMITATION,  ALL
TYPES OF NEGLIGENT  CONDUCT  IDENTIFIED IN THE RESTATEMENT  (SECOND) OF TORTS OF
ONE OR MORE OF THE INDEMNITEES OR BY REASON OF STRICT LIABILITY  IMPOSED WITHOUT
FAULT ON ANY ONE OR MORE OF THE INDEMNITEES;  PROVIDED THAT SUCH INDEMNITY SHALL
NOT, AS TO ANY INDEMNITEE,  BE AVAILABLE TO THE EXTENT THAT SUCH LOSSES, CLAIMS,
DAMAGES,  LIABILITIES OR RELATED EXPENSES ARE DETERMINED BY A COURT OF COMPETENT
JURISDICTION BY FINAL AND NONAPPEALABLE JUDGMENT TO HAVE RESULTED FROM THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH INDEMNITEE.

               (c) To the  extent  that the  Borrower  fails  to pay any  amount
required to be paid by it to the Administrative  Agent or the Issuing Bank under
Section   12.03(a)  or  (b),  each  Lender   severally  agrees  to  pay  to  the
Administrative  Agent or the Issuing  Bank,  as the case may be,  such  Lender's
Applicable   Percentage   (determined   as  of  the  time  that  the  applicable
unreimbursed  expense or  indemnity  payment is sought) of such  unpaid  amount;
provided that the  unreimbursed  expense or  indemnified  loss,  claim,  damage,
liability  or related  expense,  as the case may be, was incurred by or asserted
against the Administrative Agent or the Issuing Bank in its capacity as such.

               (d) To the extent permitted by applicable law, the Borrower shall
not assert, and hereby waives,  any claim against any Indemnitee,  on any theory
of  liability,  for special,  indirect,  consequential  or punitive  damages (as
opposed to direct or actual damages) arising out of, in connection with, or as a
result  of,  this  Agreement,  any  other  Loan  Document  or any  agreement  or
instrument contemplated hereby or thereby, the Transactions,  any Loan or Letter
of Credit or the use of the proceeds thereof.

               (e) All  amounts  due under this  Section  12.03 shall be payable
promptly after written demand therefor.

         Section 12.04 Successors and Assigns.
                       ----------------------

               (a) The  provisions of this  Agreement  shall be binding upon and
inure to the benefit of the parties hereto and their  respective  successors and
assigns  permitted  hereby  (including  any  Affiliate  of the Issuing Bank that
issues any Letter of  Credit),  except that (i) the  Borrower  may not assign or
otherwise transfer any of its rights or obligations  hereunder without the prior
written consent of each Lender (and any attempted  assignment or transfer by the
Borrower  without  such  consent  shall be null and void) and (ii) no Lender may

                                       82

assign or  otherwise  transfer  its rights or  obligations  hereunder  except in
accordance  with this Section  12.04.  Nothing in this  Agreement,  expressed or
implied,  shall be construed  to confer upon any Person  (other than the parties
hereto, their respective  successors and assigns permitted hereby (including any
Affiliate  of the Issuing  Bank that issues any Letter of Credit),  Participants
(to the  extent  provided  in Section  12.04(c))  and,  to the extent  expressly
contemplated  hereby, the Related Parties of each of the  Administrative  Agent,
the Issuing Bank and the Lenders) any legal or equitable right,  remedy or claim
under or by reason of this Agreement.

               (b)  (i)  Subject  to  the   conditions   set  forth  in  Section
12.04(b)(ii), any Lender may assign to one or more assignees all or a portion of
its rights and obligations  under this Agreement  (including all or a portion of
its  Commitment  and the Loans at the time  owing to it) with the prior  written
consent (such consent not to be unreasonably withheld) of:

                         (A) the  Borrower,  provided  that  no  consent  of the
Borrower  shall be required  for an  assignment  to a Lender,  an Affiliate of a
Lender,  an  Approved  Fund (as defined  below) or, if an  Event of  Default has
occurred and is continuing, any other assignee; and

                         (B) the  Administrative Agent, provided that no consent
of the Administrative  Agent shall be required for an  assignment to an assignee
that is a Lender immediately prior to giving effect to such assignment.

                    (ii)   Assignments   shall  be  subject  to  the   following
          additional conditions:

                         (A)  except in the case of an assignment to a Lender or
an Affiliate of a Lender or an assignment of the entire remaining  amount of the
assigning  Lender's  Commitment,  the amount of the  Commitment of the assigning
Lender subject to each such assignment (determined as of the date the Assignment
and   Assumption   with  respect  to  such   assignment   is  delivered  to  the
Administrative  Agent)  shall not be less  than  $5,000,000  unless  each of the
Borrower and the Administrative  Agent otherwise consent,  provided that no such
consent of the  Borrower  shall be required if an Event of Default has  occurred
and is continuing;

                         (B)  each  partial  assignment  shall  be  made  as  an
assignment of a  proportionate  part of all the assigning  Lender's  rights and
obligations under this Agreement;

                         (C) the parties to each assignment shall execute and
deliver to the Administrative Agent an Assignment and Assumption, together  with
a processing and recordation fee of $3,500;

                         (D) the  assignee, if  it shall not be a  Lender, shall
deliver to the Administrative Agent an Administrative Questionnaire; and

                         (E) in  the  case  of  an  assignment  to  a  CLO,  the
assigning  Lender  shall  retain  the  sole  right  to  approve  any  amendment,
modification  or waiver of any  provision of this  Agreement,  provided that the
Assignment and Assumption between such Lender and such CLO may provide that such
Lender  will  not,  without  the  consent  of such CLO, agree  to any amendment,
modification  or waiver described in the first proviso  to  Section  12.02  that
affects such CLO.

                                       83

                    (iii) Subject to Section 12.04(b)(iv) and the acceptance and
          recording thereof, from and after the effective date specified in each
          Assignment  and Assumption  the assignee  thereunder  shall be a party
          hereto and, to the extent of the interest  assigned by such Assignment
          and Assumption, have the rights and obligations of a Lender under this
          Agreement, and the assigning Lender thereunder shall, to the extent of
          the interest  assigned by such Assignment and Assumption,  be released
          from its  obligations  under this  Agreement  (and,  in the case of an
          Assignment  and  Assumption  covering  all of the  assigning  Lender's
          rights and obligations  under this Agreement,  such Lender shall cease
          to be a party hereto but shall continue to be entitled to the benefits
          of Section 5.01,  Section 5.02,  Section 5.03 and Section 12.03).  Any
          assignment or transfer by a Lender of rights or obligations under this
          Agreement  that does not  comply  with  this  Section  12.04  shall be
          treated for  purposes of this  Agreement as a sale by such Lender of a
          participation  in such  rights  and  obligations  in  accordance  with
          Section 12.04(c).

                    (iv) The Administrative Agent, acting for this purpose as an
          agent of the Borrower,  shall maintain at one of its offices a copy of
          each Assignment and Assumption  delivered to it and a register for the
          recordation of the names and addresses of the Lenders, and the Maximum
          Credit  Amount  of,  and   principal   amount  of  the  Loans  and  LC
          Disbursements  owing to, each Lender pursuant to the terms hereof from
          time to time (the  "Register").  The entries in the Register  shall be
                              --------
          conclusive,  and the Borrower,  the Administrative  Agent, the Issuing
          Bank and the Lenders  may treat each Person  whose name is recorded in
          the Register  pursuant to the terms hereof as a Lender  hereunder  for
          all  purposes  of  this  Agreement,   notwithstanding  notice  to  the
          contrary.  The  Register  shall be  available  for  inspection  by the
          Borrower,  the Issuing Bank and any Lender, at any reasonable time and
          from time to time upon reasonable prior notice. In connection with any
          changes to the Register,  if necessary,  the Administrative Agent will
          reflect the  revisions  on Annex I and forward a copy of such  revised
          Annex I to the  Borrower,  the Issuing Bank and each Lender.  (v) Upon
          its receipt of a duly completed  Assignment and Assumption executed by
          an  assigning  Lender  and  an  assignee,   the  assignee's  completed
          Administrative  Questionnaire  (unless the assignee shall already be a
          Lender  hereunder),  the processing and recordation fee referred to in
          Section  12.04(b) and any written consent to such assignment  required
          by Section  12.04(b),  the  Administrative  Agent  shall  accept  such
          Assignment and Assumption and record the information contained therein
          in the Register. No assignment shall be effective for purposes of this
          Agreement  unless it has been  recorded in the Register as provided in
          this Section 12.04(b).

               (c) (i) Any Lender may, without the consent of the Borrower,  the
Administrative  Agent or the Issuing Bank,  sell  participations  to one or more
banks or other entities (a  "Participant")  in all or a portion of such Lender's
                             -----------
rights and obligations  under this Agreement  (including all or a portion of its
Commitment  and the  Loans  owing  to  it);  provided  that  (A)  such  Lender's
obligations under this Agreement shall remain  unchanged,  (B) such Lender shall
remain solely  responsible  to the other parties  hereto for the  performance of
such  obligations and (C) the Borrower,  the  Administrative  Agent, the Issuing
Bank and the other Lenders shall  continue to deal solely and directly with such
Lender in  connection  with such  Lender's  rights  and  obligations  under this
Agreement.  Any agreement or instrument  pursuant to which a Lender sells such a

                                       84

participation  shall  provide  that such Lender  shall  retain the sole right to
enforce this Agreement and to approve any amendment,  modification  or waiver of
any provision of this Agreement;  provided that such agreement or instrument may
provide that such Lender will not, without the consent of the Participant, agree
to any  amendment,  modification  or waiver  described in the proviso to Section
12.02 that affects such  Participant.  In addition such  agreement  must provide
that the  Participant be bound by the  provisions of Section  12.03.  Subject to
Section  12.04(c)(ii),  the  Borrower  agrees  that  each  Participant  shall be
entitled to the benefits of Section  5.01,  Section 5.02 and Section 5.03 to the
same extent as if it were a Lender and had acquired  its interest by  assignment
pursuant to Section  12.04(b).  To the extent permitted by law, each Participant
also shall be  entitled  to the  benefits  of Section  12.08 as though it were a
Lender,  provided such  Participant  agrees to be subject to Section  4.01(c) as
though it were a Lender.

                    (ii) A  Participant  shall not be  entitled  to receive  any
          greater payment under Section 5.01 or Section 5.03 than the applicable
          Lender  would  have been  entitled  to  receive  with  respect  to the
          participation  sold  to  such  Participant,  unless  the  sale  of the
          participation  to such  Participant is made with the Borrower's  prior
          written  consent.  A Participant  that would be a Foreign Lender if it
          were a Lender  shall not be entitled to the  benefits of Section  5.03
          unless the  Borrower  is notified  of the  participation  sold to such
          Participant  and  such  Participant  agrees,  for the  benefit  of the
          Borrower, to comply with Section 5.03(e) as though it were a Lender.

               (d) Any  Lender  may at any time  pledge  or  assign  a  security
interest  in all or any  portion of its rights  under this  Agreement  to secure
obligations  of such  Lender,  including  any  pledge  or  assignment  to secure
obligations to a Federal Reserve Bank, and this Section 12.04(d) shall not apply
to any such pledge or assignment of a security  interest;  provided that no such
pledge or assignment of a security  interest  shall release a Lender from any of
its  obligations  hereunder or substitute  any such pledgee or assignee for such
Lender as a party hereto.

         Section 12.05 Survival; Revival; Reinstatement.
                       --------------------------------

               (a) All  covenants,  agreements,  representations  and warranties
made  by the  Borrower  herein  and in the  certificates  or  other  instruments
delivered  in  connection  with or pursuant to this  Agreement or any other Loan
Document  shall be  considered  to have been  relied  upon by the other  parties
hereto and shall survive the  execution  and delivery of this  Agreement and the
making of any Loans and  issuance  of any Letters of Credit,  regardless  of any
investigation made by any such other party or on its behalf and  notwithstanding
that the  Administrative  Agent,  the  Issuing  Bank or any  Lender may have had
notice or knowledge of any Default or  incorrect  representation  or warranty at
the time any credit is extended hereunder,  and shall continue in full force and
effect as long as the  principal  of or any accrued  interest on any Loan or any
fee or any other amount payable under this  Agreement is outstanding  and unpaid
or any Letter of Credit is outstanding and so long as the  Commitments  have not
expired or  terminated.  The provisions of Section 5.01,  Section 5.02,  Section
5.03 and Section 12.03 and ARTICLE XI shall survive and remain in full force and
effect regardless of the consummation of the transactions  contemplated  hereby,
the  repayment of the Loans,  the  expiration or  termination  of the Letters of
Credit and the Commitments or the termination of this Agreement,  any other Loan
Document or any provision hereof or thereof.

                                       85

               (b) To the  extent  that  any  payments  on the  Indebtedness  or
proceeds  of  any  collateral  are  subsequently  invalidated,  declared  to  be
fraudulent  or  preferential,  set aside or  required to be repaid to a trustee,
debtor in possession,  receiver or other Person under any bankruptcy law, common
law or equitable cause, then to such extent, the Indebtedness so satisfied shall
be revived and continue as if such payment or proceeds had not been received and
the Administrative  Agent's and the Lenders' Liens, security interests,  rights,
powers and remedies  under this  Agreement and each Loan Document shall continue
in  full  force  and  effect.  In  such  event,  each  Loan  Document  shall  be
automatically  reinstated  and the  Borrower  shall  take such  action as may be
reasonably  requested by the Administrative Agent and the Lenders to effect such
reinstatement.

         Section 12.06 Counterparts; Integration; Effectiveness.
                       ----------------------------------------

               (a)  This  Agreement  may be  executed  in  counterparts  (and by
different  parties  hereto  on  different  counterparts),  each of  which  shall
constitute an original,  but all of which when taken together shall constitute a
single contract.

               (b) This  Agreement,  the other Loan  Documents  and any separate
letter  agreements  with  respect to fees  payable to the  Administrative  Agent
constitute the entire contract among the parties  relating to the subject matter
hereof  and  thereof  and  supersede  any  and  all  previous   agreements   and
understandings,  oral or  written,  relating to the  subject  matter  hereof and
thereof.  This  Agreement  and the  other  Loan  Documents  represent  the final
agreement  among the parties hereto and thereto 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.

               (c) Except as  provided in Section  6.01,  this  Agreement  shall
become  effective when it shall have been executed by the  Administrative  Agent
and when the Administrative Agent shall have received counterparts hereof which,
when taken  together,  bear the signatures of each of the other parties  hereto,
and  thereafter  shall be binding  upon and inure to the  benefit of the parties
hereto and their  respective  successors  and  assigns.  Delivery of an executed
counterpart of a signature page of this Agreement by telecopy shall be effective
as delivery of a manually executed counterpart of this Agreement.

         Section  12.07  Severability.  Any  provision of this  Agreement or any
                         ------------
other  Loan  Document  held  to be  invalid,  illegal  or  unenforceable  in any
jurisdiction  shall,  as to such  jurisdiction,  be ineffective to the extent of
such invalidity,  illegality or unenforceability without affecting the validity,
legality and enforceability of the remaining  provisions hereof or thereof;  and
the invalidity of a particular provision in a particular  jurisdiction shall not
invalidate such provision in any other jurisdiction.

         Section  12.08  Right of  Setoff.  If an Event of  Default  shall  have
                         ----------------
occurred and be  continuing,  each Lender and each of its  Affiliates  is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all  deposits  (general  or  special,  time or
demand,  provisional  or  final)  at any time  held and  other  obligations  (of
whatsoever  kind,   including,   without  limitations   obligations  under  Swap
Agreements)  at any time owing by such Lender or  Affiliate to or for the credit
or the account of the Borrower or any Material Subsidiary against any of and all

                                       86

the  obligations of the Borrower or any Material  Subsidiary owed to such Lender
now or  hereafter  existing  under this  Agreement  or any other Loan  Document,
irrespective of whether or not such Lender shall have made any demand under this
Agreement  or any other Loan  Document  and  although  such  obligations  may be
unmatured. The rights of each Lender under this Section 12.08 are in addition to
other rights and remedies  (including  other rights of setoff) which such Lender
or its Affiliates may have.

         Section  12.09  GOVERNING  LAW;  JURISDICTION;  CONSENT  TO  SERVICE OF
                         -------------------------------------------------------
PROCESS.
- -------

               (a) THIS  AGREEMENT  AND THE  NOTES  SHALL BE  GOVERNED  BY,  AND
CONSTRUED  IN  ACCORDANCE  WITH,  THE LAWS OF THE  STATE OF TEXAS  EXCEPT TO THE
EXTENT THAT  UNITED  STATES  FEDERAL  LAW  PERMITS  ANY LENDER TO CONTRACT  FOR,
CHARGE, RECEIVE, RESERVE OR TAKE INTEREST AT THE RATE ALLOWED BY THE LAWS OF THE
STATE WHERE SUCH LENDER IS LOCATED. CHAPTER 346 OF THE TEXAS FINANCE CODE (WHICH
REGULATES  CERTAIN  REVOLVING  CREDIT  LOAN  ACCOUNTS  AND  REVOLVING  TRI-PARTY
ACCOUNTS) SHALL NOT APPLY TO THIS AGREEMENT OR THE NOTES.

               (b) ANY  LEGAL  ACTION OR  PROCEEDING  WITH  RESPECT  TO THE LOAN
DOCUMENTS  SHALL BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS OR OF THE UNITED
STATES OF AMERICA FOR THE  SOUTHERN  DISTRICT OF TEXAS,  AND, BY  EXECUTION  AND
DELIVERY OF THIS  AGREEMENT,  EACH PARTY  HEREBY  ACCEPTS FOR ITSELF AND (TO THE
EXTENT   PERMITTED  BY  LAW)  IN  RESPECT  OF  ITS   PROPERTY,   GENERALLY   AND
UNCONDITIONALLY,  THE  JURISDICTION OF THE AFORESAID  COURTS.  EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY OBJECTION,  INCLUDING,  WITHOUT LIMITATION, ANY OBJECTION
TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT
MAY NOW OR HEREAFTER  HAVE TO THE BRINGING OF ANY SUCH ACTION OR  PROCEEDING  IN
SUCH RESPECTIVE JURISDICTIONS.  THIS SUBMISSION TO JURISDICTION IS NON-EXCLUSIVE
AND DOES NOT PRECLUDE A PARTY FROM OBTAINING  JURISDICTION OVER ANOTHER PARTY IN
ANY COURT OTHERWISE HAVING JURISDICTION.

               (c) THE  BORROWER  HEREBY  IRREVOCABLY  DESIGNATES,  APPOINTS AND
EMPOWERS AND HEREBY CONFERS AN IRREVOCABLE  SPECIAL POWER, AMPLE AND SUFFICIENT,
TO CT CORPORATION SYSTEM, WITH OFFICES ON THE DATE HEREOF AT DENVER, COLORADO AS
ITS DESIGNEE,  APPOINTEE AND AGENT WITH RESPECT TO ANY SUCH ACTION OR PROCEEDING
IN TEXAS TO  RECEIVE,  ACCEPT  AND  ACKNOWLEDGE  FOR AND ON ITS  BEHALF,  AND IN
RESPECT OF ITS PROPERTY,  SERVICE OF ANY AND ALL LEGAL PROCESS, SUMMONS, NOTICES
AND  DOCUMENTS  WHICH MAY BE SERVED IN ANY SUCH  PROCEEDING  AND AGREES THAT THE
FAILURE OF SUCH  AGENT TO GIVE ANY ADVICE OF ANY SUCH  SERVICE OF PROCESS TO THE
BORROWER SHALL NOT IMPAIR OR AFFECT THE VALIDITY OF SUCH SERVICE OR OF ANY CLAIM
BASED THEREON. IF FOR ANY REASON SUCH DESIGNEE,  APPOINTEE AND AGENT SHALL CEASE
TO BE AVAILABLE TO ACT AS SUCH, THE BORROWER AGREES TO DESIGNATE A NEW DESIGNEE,

                                       87

APPOINTEE AND AGENT IN TEXAS REASONABLY SATISFACTORY TO THE ADMINISTRATIVE AGENT
ON THE TERMS AND FOR THE  PURPOSES  OF THIS  PROVISION.  EACH PARTY  IRREVOCABLY
CONSENTS  TO THE SERVICE OF PROCESS OF ANY OF THE  AFOREMENTIONED  COURTS IN ANY
SUCH ACTION OR  PROCEEDING  BY THE MAILING OF COPIES  THEREOF BY  REGISTERED  OR
CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT THE ADDRESS SPECIFIED IN Section 12.01
OR SUCH  OTHER  ADDRESS  AS IS  SPECIFIED  PURSUANT  TO  Section  12.01  (OR ITS
ASSIGNMENT AND  ASSUMPTION),  SUCH SERVICE TO BECOME  EFFECTIVE THIRTY (30) DAYS
AFTER SUCH  MAILING.  NOTHING  HEREIN  SHALL  AFFECT THE RIGHT OF A PARTY OR ANY
HOLDER OF A NOTE TO SERVE  PROCESS IN ANY OTHER  MANNER  PERMITTED  BY LAW OR TO
COMMENCE LEGAL  PROCEEDINGS OR OTHERWISE  PROCEED  AGAINST  ANOTHER PARTY IN ANY
OTHER JURISDICTION.

               (d)  EACH   PARTY  HEREBY  (i)  IRREVOCABLY  AND  UNCONDITIONALLY
WAIVES,  TO THE  FULLEST  EXTENT  PERMITTED  BY LAW,  TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING  RELATING TO THIS  AGREEMENT OR ANY OTHER LOAN DOCUMENT AND
FOR ANY COUNTERCLAIM THEREIN; (ii) IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED  BY LAW,  ANY  RIGHT  IT MAY HAVE TO  CLAIM  OR  RECOVER  IN ANY SUCH
LITIGATION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR DAMAGES
OTHER THAN,  OR IN ADDITION TO, ACTUAL  DAMAGES;  (iii) CERTIFIES  THAT NO PARTY
HERETO  NOR ANY  REPRESENTATIVE  OR AGENT OF  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 (iv)
ACKNOWLEDGES  THAT IT HAS BEEN  INDUCED TO ENTER INTO THIS  AGREEMENT,  THE LOAN
DOCUMENTS AND THE TRANSACTIONS  CONTEMPLATED  HEREBY AND THEREBY BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS Section 12.09.

         Section 12.10 Headings.  Article and Section  headings and the Table of
                       --------
Contents used herein are for convenience of reference only, are not part of this
Agreement  and  shall  not  affect  the   construction  of,  or  be  taken  into
consideration in interpreting, this Agreement.

         Section 12.11  Confidentiality.  Each of the Administrative  Agent, the
                        ---------------
Issuing  Bank and the Lenders  agrees to  maintain  the  confidentiality  of the
Information (as defined below), except that Information may be disclosed (a)  to
its and its Affiliates'  directors,  officers,  employees and agents,  including
accountants,  legal  counsel and other  advisors (it being  understood  that the
Persons to whom such  disclosure  is made will be informed  of the  confidential
nature  of  such   Information   and   instructed   to  keep  such   Information
confidential), (b) to  the extent requested by any regulatory  authority, (c) to
the extent  required by  applicable  laws or  regulations  or by any subpoena or
similar legal  process,  (d) to  any other party to this  Agreement or any other
Loan Document, (e) in  connection with the exercise of any remedies hereunder or
under any other Loan Document or any suit, action or proceeding relating to this
Agreement or any other Loan Document or the  enforcement of rights  hereunder or
thereunder, (f) subject to an agreement  containing provisions substantially the
same as those of this Section 12.11,  to (i) any assignee  of or Participant in,

                                       88

or  any  prospective  assignee  of or  Participant  in,  any of  its  rights  or
obligations under this Agreement or (ii) any actual or prospective  counterparty
(or its  advisors)  to any  Swap  Agreement  relating  to the  Borrower  and its
obligations,  (g)  with the  consent of the  Borrower or (h) to  the extent such
Information  (i)  becomes publicly  available other than as a result of a breach
of this Section 12.11 or (ii) becomes available to the Administrative Agent, the
Issuing Bank or any Lender on a  nonconfidential  basis from a source other than
the Borrower.  For the purposes of this Section 12.11,  "Information"  means all
                                                         -----------
information  received from the Borrower or any Material  Subsidiary  relating to
the Borrower or any Material  Subsidiary  and their  businesses,  other than any
such information that is available to the Administrative Agent, the Issuing Bank
or any Lender on a nonconfidential  basis prior to disclosure by the Borrower or
a Material  Subsidiary;  provided that, in the case of information received from
the Borrower or any Material  Subsidiary after the date hereof, such information
is  clearly  identified  at the time of  delivery  as  confidential.  Any Person
required to maintain  the  confidentiality  of  Information  as provided in this
Section 12.11 shall be considered to have complied with its  obligation to do so
if  such  Person  has  exercised  the  same  degree  of  care  to  maintain  the
confidentiality  of such  Information  as such  Person  would  accord to its own
confidential information.

         Section  12.12  Interest  Rate  Limitation.  It is the intention of the
                         --------------------------
parties hereto that each Lender shall conform  strictly to usury laws applicable
to it. Accordingly, if the transactions contemplated hereby would be usurious as
to any Lender  under laws  applicable  to it  (including  the laws of the United
States of America  and the State of Texas or any other  jurisdiction  whose laws
may  be  mandatorily   applicable  to  such  Lender  notwithstanding  the  other
provisions of this Agreement),  then, in that event, notwithstanding anything to
the  contrary in any of the Loan  Documents  or any  agreement  entered  into in
connection with or as security for the Notes, it is agreed as  follows:  (i) the
aggregate of all consideration  which constitutes  interest under law applicable
to any Lender that is contracted  for, taken,  reserved,  charged or received by
such Lender  under any of the Loan  Documents  or  agreements  or  otherwise  in
connection with the Notes shall under no circumstances exceed the maximum amount
allowed by such applicable  law, and any excess shall be canceled  automatically
and if theretofore paid shall be credited by such Lender on the principal amount
of the  Indebtedness  (or,  to the  extent  that  the  principal  amount  of the
Indebtedness shall have been or would thereby be paid in full,  refunded by such
Lender to the Borrower); and (ii) in the event that the maturity of the Notes is
accelerated  by reason of an election of the holder  thereof  resulting from any
Event of  Default  under this  Agreement  or  otherwise,  or in the event of any
required or  permitted  prepayment,  then such  consideration  that  constitutes
interest  under law  applicable  to any Lender may never  include  more than the
maximum  amount allowed by such  applicable  law, and excess  interest,  if any,
provided for in this Agreement or otherwise shall be canceled  automatically  by
such  Lender  as of  the  date  of  such  acceleration  or  prepayment  and,  if
theretofore  paid,  shall be credited by such Lender on the principal  amount of
the  Indebtedness   (or,  to  the  extent  that  the  principal  amount  of  the
Indebtedness shall have been or would thereby be paid in full,  refunded by such
Lender to the  Borrower).  All sums paid or agreed to be paid to any  Lender for
the use,  forbearance  or detention of sums due hereunder  shall,  to the extent
permitted by law applicable to such Lender,  be amortized,  prorated,  allocated
and spread  throughout the stated term of the Loans evidenced by the Notes until
payment in full so that the rate or amount of  interest  on account of any Loans
hereunder does not exceed the maximum amount allowed by such  applicable law. If
at any time and from  time to time (i) the amount  of  interest  payable  to any
Lender on any date shall be computed at the Highest  Lawful Rate  applicable  to
such Lender pursuant to this Section 12.12 and (ii)in respect of any  subsequent

                                       89

interest  computation  period the amount of interest  otherwise  payable to such
Lender would be less than the amount of interest payable to such Lender computed
at the  Highest  Lawful  Rate  applicable  to such  Lender,  then the  amount of
interest  payable  to  such  Lender  in  respect  of  such  subsequent  interest
computation  period  shall  continue to be  computed at the Highest  Lawful Rate
applicable  to such Lender  until the total  amount of interest  payable to such
Lender shall equal the total amount of interest which would have been payable to
such Lender if the total amount of interest  had been  computed  without  giving
effect to this  Section  12.12.  To the  extent  that  Chapter  303 of the Texas
Finance Code is relevant for the purpose of determining  the Highest Lawful Rate
applicable  to a Lender,  such Lender elects to determine  the  applicable  rate
ceiling  under such  Chapter by the weekly  ceiling from time to time in effect.
Chapter  346  of the  Texas  Finance  Code  does  not  apply  to the  Borrower's
obligations hereunder.

         Section  12.13  EXCULPATION  PROVISIONS.  EACH  OF THE  PARTIES  HERETO
                         -----------------------
SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS  AND AGREES THAT IT IS CHARGED WITH NOTICE AND  KNOWLEDGE OF THE TERMS
OF THIS  AGREEMENT AND THE OTHER LOAN  DOCUMENTS;  THAT IT HAS IN FACT READ THIS
AGREEMENT AND IS FULLY  INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS,
CONDITIONS  AND  EFFECTS  OF THIS  AGREEMENT;  THAT IT HAS BEEN  REPRESENTED  BY
INDEPENDENT  LEGAL COUNSEL OF ITS CHOICE  THROUGHOUT THE NEGOTIATIONS  PRECEDING
ITS EXECUTION OF THIS AGREEMENT AND THE OTHER LOAN  DOCUMENTS;  AND HAS RECEIVED
THE ADVICE OF ITS ATTORNEY IN ENTERING  INTO THIS  AGREEMENT  AND THE OTHER LOAN
DOCUMENTS;  AND THAT IT RECOGNIZES  THAT CERTAIN OF THE TERMS OF THIS  AGREEMENT
AND THE OTHER LOAN DOCUMENTS RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT
IN SOME  ASPECTS  OF THE  TRANSACTION  AND  RELIEVING  THE  OTHER  PARTY  OF ITS
RESPONSIBILITY  FOR SUCH LIABILITY.  EACH PARTY HERETO AGREES AND COVENANTS THAT
IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY  PROVISION
OF THIS  AGREEMENT AND THE OTHER LOAN  DOCUMENTS ON THE BASIS THAT THE PARTY HAD
NO  NOTICE  OR  KNOWLEDGE  OF  SUCH  PROVISION  OR  THAT  THE  PROVISION  IS NOT
"CONSPICUOUS."

         Section 12.14  Existing  Credit  Agreement.  On the date of the initial
                        ---------------------------
funding,  the loans and other Debt of the  Borrower  under the  Existing  Credit
Agreement shall be paid in full with the proceeds of the initial funding and the
commitments of the lenders  thereunder shall be superseded by this Agreement and
terminated.  To the extent of  $3,000,000,  the Notes  represent  a renewal  and
rearrangement  of the promissory  notes issued  pursuant to the Existing  Credit
Agreement.

                          [SIGNATURES BEGIN NEXT PAGE]

                                       90





         The parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.

BORROWER:                               ST MARY LAND & EXPLORATION COMPANY


                                        By:/s/MILAM RANDOLPH PHARO
                                           -------------------------------
                                        Name: Milam Randolph Pharo
                                        Title:Vice President - Land & Legal




AGENTS AND LENDERS:                     WACHOVIA BANK, NATIONAL
                                        ASSOCIATION, Individually and as
                                        Administrative Agent


                                        By:/s/ PHILIP J TRINDER
                                           -------------------------------
                                        Name: Philip J. Trinder
                                        Title:Vice President




                                        BANK ONE, NA, Individually and as
                                        Co-Syndication Agent


                                        By:/s/ J SCOTT FOWLER
                                           -------------------------------
                                        Name:  J. Scott Fowler
                                        Title: Director, Capital Markets





                                        WELLS FARGO BANK, N.A., Individually
                                        and as Co-Syndication Agent


                                        By:/s/ LAURA BUMGARNER
                                           -------------------------------
                                        Name: Laura Bumgarner
                                        Title:Relationship Manager





                                        ROYAL BANK OF CANADA, Individually and
                                        as Co-Documentation Agent


                                        By:/s/ JASON YORK
                                           -------------------------------
                                        Name: Jason York
                                        Title:Manager





                                        COMERICA BANK-TEXAS, Individually and
                                        as Co-Documentation Agent


                                        By:/s/ THOMAS G RAJAN
                                           -------------------------------
                                        Name: Thomas G. Rajan
                                        Title:Vice President





                                        BNP PARIBAS


                                        By:/s/ DOUGLAS R LIFTMAN
                                           -------------------------------
                                        Name: Douglas R. Liftman
                                        Title:Managing Director


                                        By:/s/ BETSY JOCHER
                                           -------------------------------
                                        Name: Betsy Jocher
                                        Title:Vice President



                                        BANK OF SCOTLAND


                                        By:/s/ JOSEPH FRATUS
                                           -------------------------------
                                        Name: Joseph Fratus
                                        Title:First Vice President






                                        U.S. BANK NATIONAL ASSOCIATION


                                        By:/s/ MARK E THOMPSON
                                           -------------------------------
                                        Name: Mark E. Thompson
                                        Title:Vice President





                                        HIBERNIA NATIONAL BANK


                                        By:/s/ DARIA MAHONEY
                                           -------------------------------
                                        Name: Daria Mahoney
                                        Title:Vice President

EX-10

                                                                   Exhibit 10.45

                   AMENDMENT TO AND EXTENSION OF OFFICE LEASE


     This  Amendment to and Extension of Office Lease (this  "Amendment")  is by
and  between  MASSACHUSETTS  MUTUAL  LIFE  INSURANCE  COMPANY,  a  Massachusetts
corporation  ("Landlord"),  through its agent, CORNERSTONE REAL ESTATE ADVISERS,
INC.,  and ST.  MARY LAND &  EXPLORATION  COMPANY,  a  Delaware  corporation
("Tenant"), and is dated as of December 14, 2001.

     1. Purpose.  This Amendment amends and extends that certain lease agreement
        -------
titled  Indenture  dated June 1, 1989 (the "Original  Lease") by and between The
Equitable Life Assurance  Society of the United States,  a New York  corporation
("Equitable"),  and  Parish  Corporation,  a  Colorado  corporation  ("Parish").
Equitable  conveyed its  interest in the Property and in the Original  Lease (as
amended) to  Landlord.  Parish has  assigned its interest in the Lease to Tenant
and  Tenant has  assumed  Parish's  obligations  under the Lease as set forth in
paragraph  25,  below.  Landlord  and  Tenant  desire  to extend  the  currently
effective term of the Original  Lease (as amended),  to modify the definition of
the Premises,  to provide for certain improvements to the Premises,  and to make
certain other modifications to the Original Lease.

     2.  Interpretation.  For  purposes of this  Amendment,  the term  "Original
         --------------
Lease"  means  only the June 1, 1989  Indenture,  described  above  (but not any
amendment  thereto) and  paragraphs 1 through 3 of the Rider  attached  thereto.
This Amendment amends the provisions and extends the term of the Original Lease.
In the event of any  inconsistency  between the provisions of this Amendment and
the provisions of the Original  Lease,  the  provisions of this Amendment  shall
control.  Capitalized terms used and not otherwise defined herein shall have the
meanings  set forth  for them in the  Original  Lease.  This  Amendment  and the
Original Lease are referred to collectively as this "Lease."

     3.  Premises.  As of the date of this  Amendment,  Tenant  occupies  all of
         --------
Floors 7, 9, and 11 and  portions  of  Floors  6, 8, and 10 of Denver  Financial
Center Tower II, Denver,  Colorado (the "Building") pursuant to the terms of the
Original Lease (as amended).

           a. On or  before  approximately  February  1,  2002,  Landlord  shall
complete Tenant Improvements,  as described in paragraph 10, below, to Suite 420
as shown on Exhibit A ("Suite 420") and to the 5th Floor of the  Building.  Upon
            ---------
such  completion,  Tenant shall take  possession  of such space  pursuant to the
terms of this  Lease.  Tenant  shall  thereupon  surrender  all space on the 6th
Floor,  8th  Floor,  and 10th Floor (to the  extent  occupied  by Tenant) of the
Building,  Landlord shall complete  Tenant  Improvements  to the 6th Floor on or
before approximately April 1, 2002 pursuant to paragraph 10, below at which time
Tenant shall commence  occupancy  thereof  pursuant to this Lease.  Tenant shall
thereupon  surrender  all space on the 7th Floor,  and Landlord  shall  complete
Tenant  Improvements  to the 7th Floor on or before  approximately  June 1, 2002
pursuant to  paragraph  10,  below,  at which time  Tenant  shall  complete  the
vacation of the 11th Floor and commence  occupancy of the 7th Floor  pursuant to
this Lease.  In addition,  this Lease shall be effective as of June 1, 2002 with
respect to Tenant's  occupancy of the 9th Floor of the  Building.  The estimated
completion  dates in this  paragraph  are  dependent  upon,  among other things,
Tenant's  compliance  with the  provisions of paragraph 10, below,  and shall be
subject to delays caused by Force Majeure (as defined below).

           b. For purposes of this Lease,  Suite 420 and the 5th,  6th, 7th, and
9th Floors of the Building  shall  constitute  the  "Premises"  and be deemed to
consist of  approximately  42,660 rentable square feet.  Rentable square footage
computations  are made by Landlord in accordance with BOMA method of measurement
ANSI/BOMA Z65.1-1996.

           c. The  Commencement  Date under this  Amendment with respect to each
floor,  or  portion  thereof,  set forth  above  shall be the date  which is the
earlier of (i) the date Tenant commences actual occupancy of such portion of the
Premises  and  (ii)  the date  which  is the  later  of the  date  set  forth in
subparagraph  (a),  above,  or the date such  portion of the  Premises  has been
substantially completed in accordance with the plans as determined in writing by
the  architect  subject  only to  punch-list  items  which  will not  materially
interfere  with  Tenant's  occupancy of such portion of the Premises and, in the
case of the 9th Floor, June 1, 2002. The termination date with respect to leased
space  under the  Original  Lease shall be the date on which  Tenant  completely
vacates  and  surrenders  to  Landlord  all space on a  particular  floor in the
condition  required by the Original  Lease,  except with respect to any floor or
portion  thereof which is intended by the Plans to be demolished  and rebuilt as
part of the Premises.

     4. Property. For purposes of determining operating expenses under paragraph
        --------
1(b) of the Lease,  "Property" means the commercial office  structure,  together
with all appurtenant plazas,  subgrade areas, and other improvements situated on
the land and known as the "Denver  Financial  Center  Tower I and Tower II", and
Tenant's share means 9.79% (42,660/435,672).

     5.  Effective Date and Rent  Commencement.  Payment of rent with respect to
         -------------------------------------
each portion of the Premises  under this Lease shall commence three months after
the Commencement  Date as determined under paragraph 3(c),  above. The estimated
dates on which rent shall commence with respect to various floors comprising the
Premises are as follows:

                    Suite 420 and 5th Floor:       May 1, 2002
                    6th Floor:                     July 1, 2002
                    7th and 9th Floors:            September 1, 2002

As Tenant vacates  floors as  contemplated  by paragraph 3, above,  rent payable
under the Original Lease for such vacated floors shall  terminate.  Landlord and
Tenant intend that, so long as Tenant's relocation from currently occupied space
to newly  remodeled  portions of the Premises in a  commercially  reasonable and
business-like  matter, rent payments due with respect to the space being vacated
shall  terminate  as of the  Commencement  Date with  respect  to the new space.
Except as provided in this paragraph 5 and paragraph 3(c),  above, the effective
date for the application of this Amendment shall be June 1, 2002.

                                       2

     6. Lease Term. The Lease Term for the Premises shall expire May 31, 2012.
        ----------

     7. Rent. Tenant shall pay Base Rent, Additional Rent, and all other amounts
        ----
due to Landlord  under this Lease on the first day of each month during the Term
(and pro rata for any  partial  month)  at the  office  of  Landlord's  building
manager,  currently Transwestern Commercial Services, 1775 Sherman Street, Lobby
Level,  Denver,  CO 80203  without  demand,  the same being  waived and  without
set-off or deduction, according to the following schedule:

                                 Annual               Annual          Monthly
Time Period                      Rent Per r.s.f.      Rent            Rent
- -----------                      ---------------      ----            ----

Commencement Date - 05/31/04     $17.50 per r.s.f     $746,550.00     $62,212.50
6/1/04 - 05/31/07                $18.50 per r.s.f     $789,210.00     $65,767.50
6/1/07 - 05/31/12                $19.50 per r.s.f.    $831,870.00     $69,322.50

     8. Base  Year.  Under  this  Lease,  the Base Year for Taxes and  Operating
        ----------
Expenses shall be the full calendar year 2002. Each calendar year,  Tenant shall
pay its Tenant's share (9.79%) of the difference  between Operating Expenses and
Taxes for such calendar year and actual  Operating  Expenses and Taxes  incurred
during the Base Year.

     9.  Taxes  and  Operating  Expenses.  For  purposes  of the  provisions  of
         -------------------------------
paragraph 1(b) of the Original  Lease,  Taxes and Operating  Expenses shall have
the following meanings:

                    Taxes:  The term  "Taxes"  means all taxes and  assessments,
               special or otherwise, levied upon or with respect to the Building
               and the Property (including air rights) imposed by federal, state
               or local  government,  use,  occupancy,  excise or other  similar
               taxes,  and  taxes on rent or  other  income  from  the  Building
               (computed,  in case of a graduated  tax as if  Landlord's  income
               from the Building were Landlord's sole taxable income),  the cost
               of contesting by appropriate proceeding the amount or validity of
               any of the  aforementioned  taxes or  assessments,  and taxes and
               assessments  of  every  kind  and  nature  whatsoever  levied  or
               assessed  and imposed on  Landlord in lieu of or in  substitution
               for existing or  additional  real or personal  property  taxes or
               assessments  on the Building or the  Property;  except that Taxes
               shall not  include  general  income,  franchise,  capital  stock,
               estate or inheritance tax, unless Landlord  equitably  determines
               that such Taxes are in lieu of or in substitution for real estate
               taxes.  In the case of special taxes and  assessments  payable in
               installments, only the amount of such installment due and payable
               during a single calendar year shall be included in Taxes for that
               year.

                                       3

                    Operating Expenses:  The term "Operating  Expenses" shall be
               deemed to include all costs which, for federal tax purposes,  may
               be expensed rather than capitalized and which Landlord will incur
               in  owning,   maintaining  and  operating  the  Building  or  the
               Property,  exclusive of Taxes, as hereinabove  defined,  mortgage
               interest and depreciation.  Without  limitation to the foregoing,
               the term  "Operating  Expenses"  shall mean those costs  incurred
               during  each  year of the  term of the  Lease in  respect  of the
               operations  and  maintenance  of the Property and the Building in
               accordance  with  accepted  principles  of sound  management  and
               accounting  practices as applied to the operation and maintenance
               of comparable  office buildings in the Central Business  District
               of Denver,  Colorado,  including  the cost of or charges  for the
               following  by  way  of  illustration,   but  without  limitation:
               landscaping  and  snow  removal,   water  and  sewer,   insurance
               premiums,   licenses,  permits  and  inspections,   heat,  light,
               electrical   power,   steam,   security,   janitorial   services,
               maintenance of and repairs to equipment servicing the Property or
               the  Building,   window   cleaning,   refuse  removal   services,
               air-conditioning,   supplies,  materials,  equipment  and  tools,
               administration  and  management of the Property and the Building,
               changing the Building's  electric service provider and associated
               installation, maintenance, repair and service costs, changing any
               company providing electricity service, personal property taxes on
               the personal  property  used in the  operation of the Property or
               the Building,  the cost, as amortized over the useful life of the
               improvement as reasonably determined by Landlord with interest at
               one and one-half  percent  (l1/2%) above the prime rate announced
               from  time to time  by the  Wells  Fargo  Bank of  Denver  on the
               unamortized  amount of any  capital  improvement  made  after the
               Effective Date which reduces Operating Expenses, but in an amount
               not to exceed such  reduction for the relevant year, and the cost
               of contesting by appropriate proceedings the applicability to the
               Property  or  the  Building  or  the  validity  of  any  statute,
               ordinance,  rule or  regulation  affecting  the  Property  or the
               Building  which  might  increase  Operating  Expenses.  Operating
               Expenses  shall not include:  (i) costs for repairs or other work
               occasioned by fire,  windstorm or other  insured  casualty to the
               extent  covered by  insurance  proceeds;  (ii) costs  incurred in
               leasing  or  procuring  new  tenants  (i.e.,  lease  commissions,
               advertising   costs  and  costs  for  renovating  space  for  new
               tenants);  (iii) legal costs in enforcing the terms of any lease;
               (iv)  interest  or  amortization  payments  on  any  mortgage  or
               mortgages;  (v)  rental  for any  ground or  underlying  lease or
               leases; (vi) salaries or other compensation paid to any executive
               employees above the grade of Senior Property  Manager (unless the
               resident Senior Property Manager has executive  responsibilities,
               in which case such  person's  salary shall be  allocated  between
               duties  as  property  manager,  which  shall  be  charged  as  an
               Operating Expense, and duties as an executive, which shall not be
               allocated as an Operating  Expense);  (vii) wages,  salaries,  or

                                       4

               other  compensation  paid for clerks or attendants in concessions
               or newsstands  operated by Landlord;  and (viii) those exclusions
               from Operating Expenses listed on Exhibit B to this Amendment.
                                                 ---------

If Landlord makes any capital  improvement during the term of the Lease in order
to comply with safety or any other  requirements of any federal,  state or local
law or governmental regulation that is enacted after the date of this Amendment,
then the cost as amortized over the useful life of the improvement as reasonably
determined  by the Landlord with  interest at one and one-half  percent  (l1/2%)
above the prime rate  announced from time to time by Wells Fargo Bank of Denver,
shall be deemed an Operating  Expense in each of the calendar years during which
such amortization  occurs, and Tenant shall be responsible for Tenant's Share of
any such amortized expense.

     The remaining terms of Paragraph 1(b) are not modified.

     10. Tenant Improvements.
         -------------------

           a. Landlord shall provide to Tenant an allowance (the "TI Allowance")
of up to $32.70 per rentable  square foot of Suite 420 and Floors 5, 6, and 7 of
the Building, approximately 33,181 rentable square feet, or $1,085,018.70.  Such
allowance  shall be  utilized  by Tenant  solely for the  architecture,  design,
engineering,   construction,  and  construction  management  (including  project
management  services of CRESA  Partners or an affiliate up to a maximum of $2.00
per rentable  square foot) in the  construction  of Tenant  Improvements  to the
Premises.  Landlord shall charge a construction management fee of 2% of the hard
construction costs which shall be paid from the TI Allowance. "Hard construction
costs"  include  all  costs of  labor  and  materials  related  to the  physical
construction  of the Tenant  Improvements  and do not include fees of architects
and engineers,  project management fees, or insurance. Tenant Improvements shall
include only those additions and improvements which are considered real property
under Colorado law,  including capital  improvements to the Building as approved
by  Landlord  and  shall be  installed  only  pursuant  to  detailed  plans  and
specifications  which have been approved in advance by Landlord,  which approval
shall not be unreasonably withheld or delayed. Landlord and Tenant have approved
the preliminary space plan (the "Preliminary  Drawings") for improvements to the
Premises (as finally  embodied in the  detailed  plans and  specifications,  the
"Tenant  Improvements")  prepared  by  W.E.  Kieding  Interior  Architects  (the
"Architect").  Landlord  shall  review  the  detailed  plans and  specifications
described above and provide  comments to Tenant within five (5) business days of
delivery.  Thereafter,  comments on revised  plans and plan  revisions  shall be
provided no later than two (2) business days after request by the other party.

                i.  All  such  Tenant  Improvements  shall  be  completed  by  a
        contractor  reasonably  approved  by  Landlord  pursuant  to a  contract
        between such contractor and Landlord.

                ii.  Landlord  shall  require its general  contractor to solicit
        written bids from reputable subcontractors and suppliers with respect to

                                       5

        all material subcontracts and material purchases.  Such subcontracts and
        contracts for material  purchases  shall be awarded to the lowest bidder
        unless Tenant consents to use of a different  subcontractor or supplier,
        and such consent shall be granted on a  commercially  reasonable  basis.
        The contract with the general  contractor  shall contain the  provisions
        set forth in this subparagraph.

                iii.  Landlord  reserves  the right to  require  that any Tenant
        Improvement  affecting  any  significant  system in the  Building  to be
        completed  only by Landlord's  contractor or  subcontractor  at Tenant's
        expense,  provided the charges of such  contractors are competitive with
        others in their trade.

                iv.  Tenant  shall be liable to pay any amount  for such  Tenant
        Improvements  in excess of the amount of the  allowance  set forth above
        ("Excess Costs").  Landlord shall promptly notify Tenant upon Landlord's
        discovery that there are Excess Costs,  whereupon  Tenant shall have the
        opportunity  to make changes to the  approved  plans so as to reduce the
        costs. Landlord shall, upon Tenant's written request,  finance an amount
        to pay for Excess Costs not to exceed $1.00 per rentable  square foot or
        $33,181.00.  Such amount shall be amortized  over the remaining  Term of
        the Lease at an  interest  rate of 12% per year and paid to  Landlord in
        equal installments monthly as Base Rent.

           b. Tenant may  authorize  changes in the Tenant  Improvements  during
construction  only by written change order.  All such changes will be subject to
Landlord's  prior written  approval,  which approval  shall not be  unreasonably
withheld or delayed, and shall be subject to Tenant's final agreement in writing
as to any  delays  attributable  to the  change  and the  costs  of such  change
(including  availability  of Landlord's  financing  and Tenant  electing to have
Landlord finance such costs as provide in subparagraph  (a)(iv),  above), all of
which  costs in excess of the TI  Allowance  shall be prepaid by Tenant.  Tenant
shall  confirm  its final  agreement  to a change  order by  executing a written
agreement  and paying to Landlord  any amounts  payable in  connection  with the
change  order.  If Tenant  fails to deliver the final  agreement or payment in a
timely  manner,  Tenant shall be deemed to have  withdrawn  the proposed  change
order, and Landlord will not proceed with the change.

           c. In addition to the TI Allowance  described  above,  Landlord shall
provide a TI Allowance for the portion of the Premises located on the 9th Floor.
Such TI Allowance  may be used with respect to Tenant  Improvements  for which a
building  permit is issued on or after  June 1, 2002 but prior to June 1,  2004.
The amount of the TI Allowance  shall be $32.70 per rentable  square foot of the
Premises on the 9th Floor being improved  multiplied by a fraction the numerator
which is the number of full calendar  months  remaining in the term of the Lease
subsequent to the date of issuance of the building permit and the denominator of
which is 120. The  provisions of the preceding  subparagraph  (a) shall apply to
the construction of Tenant Improvements to the 9th Floor. In the event the costs
of Tenant Improvements to the 9th Floor exceed the TI Allowance,  at the request

                                       6

of Tenant,  Landlord shall advance up to an additional  $1.00 per square foot on
the terms and conditions set forth in paragraph 10(a)(iv), above.

           d. Tenant shall receive no credit for any unused TI Allowance.

           e. The plans for  constructing  the Tenant  Improvements  contemplate
that the Landlord will make certain  repairs and  replacements  to base building
systems,  and the expense of such repairs and  replacements  are to be paid from
the TI Allowance.  Any repairs or replacements  to the base building  systems in
addition  to those  contemplated  by the plans which are  necessary  in order to
provide  services to the  Premises as required by this  Amendment or required by
appropriate  authorities to comply with  applicable  building codes shall be the
responsibility of Landlord.

           f.  Landlord  shall notify Tenant in writing at such time as Landlord
deems the  construction of a portion of the Tenant  Improvements  (which portion
shall not be less than all of the Tenant Improvements for a particular floor) to
be  complete  and the  Premises  ready  for  occupancy,  which  notice  shall be
accompanied by a certificate of the Architect that the Tenant  Improvements have
been  substantially  completed  in  accordance  with the  approved  plans.  Upon
Landlord so notifying Tenant of completion, Landlord, Tenant, and the contractor
shall conduct an inspection of the Premises to verify that the applicable Tenant
Improvements have been  satisfactorily  completed.  As a part of the inspection,
the  inspecting  parties  shall  prepare  and execute a  punch-list  of items of
incomplete  work.  Landlord  shall  cause the  general  contractor  to  promptly
commence the  punch-list  work and to complete all such work within  thirty (30)
days after the date of the punch-list.

           g. Subject to Tenant complying with reasonable  requirements relating
to balancing the HVAC system,  Landlord shall maintain the Premises according to
ASHRAE  standards  as  set  forth  in  Exhibit  C to  this  Amendment.  Tenant's
                                       ----------
requirements may include the following: maintaining window coverings in a closed
position  during the cooling  season;  not covering  registers  or returns;  not
making substantial changes in the location of electrical equipment,  lights, and
other  heat  generators  compared  to  the  plans;  not  accessing  or  changing
thermostats without input from Building management;  and not using space heaters
or other substantial generators of heat in the Premises.  Landlord shall provide
electrical  power to the Premises,  exclusive of the power  required to run base
building  systems  and  building  standard  lighting,  in an amount  equal to or
greater  than 1.7 watts per  rentable  square foot based on an "Average  Running
Load" of Tenant's low voltage  electrical  demand.  In addition,  Landlord shall
make available to Tenant and the Premises the additional  electrical  service as
set forth on Exhibit C to this  Amendment.  Landlord shall not require Tenant to
             ---------
install a submeter with respect to electrical service unless there is a material
change in  Tenant's  electrical  usage  from  that  contemplated  by the  plans.
Electrical usage, as shown on the Architect's plans dated November 2, 2001, does
not constitute  "heat  generating  machines or equipment" which triggers certain
rights of Landlord under Section 2(b) of the Original Lease.

                                       7

           h. Upon  default by Landlord in providing  electrical  service to the
Premises,  Tenant  shall have the right to an  abatement of rent for each day in
which there has been an Interruption  of Electrical  Service (as defined below).
Landlord shall be deemed to be in default in providing  electrical  service only
if, in any  12-month  period,  there  have been more than two  Interruptions  in
Electrical  Service  or if,  during  the  Term,  there  have been more than four
Interruptions in Electrical Service. An Interruption in Electrical Service shall
mean that:

                i. there has been a failure to provide electrical service to any
        part of the Premises at the minimum levels required by this Amendment;

                ii.  the  interruption  has,  in  Tenant's  reasonable  opinion,
        materially interfered with its ability to conduct its business;

                iii. the  interruption  is for reasons other than Force Majeure,
        except  insufficiency  in capacity of the Building's  base systems shall
        not be deemed to be beyond Landlord's reasonable control; and

                iv.   Tenant  has  given   Landlord   written   notice  of  such
        interruption and interference within one business day of its occurrence.

Upon any Interruption of Electrical Service,  Landlord will use its best efforts
to  determine  the  cause of the  interruption  and  remedy  the same as soon as
possible.  Thereafter,  Landlord  shall  notify  Tenant as to what  Landlord has
determined to be the cause of the Interruption of Electrical  Service and how it
has remedied the same. Tenant, through its engineers and consultants, shall have
the right, at Tenant's expense, to participate in investigating the cause of the
interruption.  Tenant's  remedies  hereunder  shall be in  addition to any other
remedies available to Tenant.

     11. Brokerage. Tenant warrants to Lender that Tenant has not dealt with any
broker, agent, or other person who may be entitled to a commission in connection
with the  modification  and extension of the Lease other than CRESA Partners and
Cushman &  Wakefield of Colorado,  Inc.  ("Cushman").  Cushman is Landlord's
agent and owes a fiduciary obligation to Landlord only. Tenant is represented by
CRESA Partners which owes a fiduciary obligation to Tenant only. Landlord agrees
to pay CRESA  Partners a brokerage  commission  with respect to the execution of
this Lease equal to  $178,140.00.  One half of such  commission,  or $89,070.00,
will be paid to CRESA  Partners upon execution and delivery of this Amendment to
Landlord and the balance shall be paid promptly following  Landlord's receipt of
Tenant's rent payment due May 1, 2002 and Tenant's  having taken full possession
of Suite  420 and the 5th and 6th  Floors to the  extent  such  portions  of the
Premises are ready for occupancy.

     12. Right of First Refusal.
         ----------------------

           a. Subject to the terms and conditions contained herein, Tenant shall
have a continuing  right ("Option") to lease all or part of the remaining office
space  located  on the 4th and 8th  Floors of the  Building,  respectively  (the

                                        8

"Option  Space"),  on and subject to the terms of this paragraph 12. This Option
shall be subject to  Landlord's  right to lease all or part of the Option  Space
which  becomes  subject  to a Letter  of  Intent  to  Lease  ("LOI")  between  a
prospective  tenant and  Landlord  from time to time  ("Offer  Space")  provided
Landlord  gives Tenant notice of its intent to lease such Offer Space and Tenant
does not  exercise  its  Option  to  lease  such  Offer  Space  as  provided  in
subparagraph (b), below.

           b. If during the initial Term of this Lease,  Landlord enters an LOI,
Landlord shall promptly  provide Tenant with written notice (the "Offer Notice")
that  Landlord has entered  into the LOI.  The Offer  Notice shall  identify the
Offer Space, the name of the prospective tenant, and the rent rate. Tenant shall
have seven (7) business days following the Offer Notice within which to exercise
its  Option  to lease  the Offer  Space in  accordance  with the terms set forth
below.  Should Tenant indicate that it is not prepared to lease the Offer Space,
whether by notice to  Landlord  or by  failing  to  respond to the Offer  Notice
within the seven (7)  business  day period,  then Tenant shall be deemed to have
waived its Option with  respect to such Offer  Space.  Upon such  waiver,  for a
period of 90 days Landlord may lease the Offer Space to the  prospective  tenant
at a rent not less than 90% of the rent set forth in the LOI  without  having to
re-offer  the Offer  Space to Tenant.  If during  such  90-day  period  Landlord
desires to lease the Offer Space to the prospective  tenant named in the LOI for
a rent  less than 90% of the rent set forth in the LOI,  Landlord  shall  notify
Tenant of such fact and again offer the Offer  Space to Tenant and Tenant  shall
accept or reject such offer within two business days. If Tenant fails to respond
within such two business-day period, Tenant shall be deemed to have rejected the
offer and Landlord may lease the Offer Space within the original  90-day  period
to the prospective  tenant pursuant to the LOI at not less than 100% of the rent
as so modified.  If Landlord  does not lease the Offer Space to the  prospective
tenant within the 90-day period,  Tenant shall again have its continuing  Option
to lease the Offer Space on the terms provided in this paragraph 12 and Landlord
shall not lease the Offer Space  unless  Landlord  re-offers  the Offer Space to
Tenant on the terms provided in subparagraph (a), above.

           c.  Tenant's  Option shall be the Option to lease the Option Space at
the then  current  rent per  square  foot  under  the  Lease  and  otherwise  in
accordance  with the terms set forth  below,  and subject to existing  rights to
expand,  extend,  or renew as set forth in this Lease.  The term of the lease of
the Option  Space  shall be  co-terminus  with the term of the Lease,  including
extensions.  Landlord  shall not be obligated to provide any allowance to Tenant
for tenant improvements or any other expense.

           d. If Tenant  exercises  such Option,  the effective date of Tenant's
leasing of the Option Space (the  "Option  Space  Effective  Date") shall be the
earlier to occur of (i) the date Tenant  occupies  the Option  Space or (ii) the
date ninety (90) days  following  Tenant's  notice of its intent to exercise its
option to lease the Option Space.

           e. The Option  Space  shall be leased in "as is"  condition,  and all
other  improvements  in the Option  Space  shall be Tenant's  responsibility  at
Tenant's cost, and shall be made in accordance with the applicable provisions of

                                       9

this  Lease  and  in  compliance  with  all  applicable  laws,  ordinances,  and
regulations. The rights of Tenant under this provision shall not be severed from
this Lease or separately sold,  assigned,  or otherwise  transferred,  and shall
terminate at the expiration of the original Lease term.

     13. Option to Renew.  Tenant,  but not any assignee or sublessee of Tenant,
         ---------------
is hereby  granted  the  option to renew this Lease for one (1) term of five (5)
years.  Provided  Tenant is not in default  (after notice and  expiration of any
applicable cure period),  Tenant may exercise such option upon written notice to
Landlord  with no less than nine (9)  months  prior  written  notice  before the
expiration  of the current  Term.  If Tenant fails to exercise the option by the
date set forth in the  preceding  sentence,  then Tenant shall be deemed to have
elected not to exercise  the option and this  renewal  option shall be deemed to
have  terminated.  Time  is of the  essence  in the  exercise  of  such  option.
Notwithstanding  the  preceding,  an assignee of Tenant  which is owned or under
common  ownership  with Tenant or which owns Tenant may  exercise  the option to
renew  set  forth in this  paragraph  13,  provided  such  assignee's  financial
position is reasonably  acceptable to Landlord and provided Tenant  continues to
be a party to the Lease during such renewal term.  For purposes of the preceding
sentence, ownership means at least 51% equity ownership and 51% voting control.

           a. The renewal term will be on the same terms and conditions as those
contained in this Lease except as follows:

                i. There shall be no further  rights to renew after the exercise
        of the renewal option;

                ii. Any tenant improvement allowance, rental concessions, or the
        like,  granted by Landlord to Tenant in the initial lease term shall not
        be applicable in the renewal term; and

                iii.  The rent for the  renewal  term shall be the "Fair  Market
        Rental  Value"  defined as the amount per  rentable  square foot for the
        Premises  during  the  renewal  term  which  is  representative  of  and
        comparable  of the  consideration  charge for  substantially  comparable
        office space in the Central Business District of Denver, Colorado taking
        into  consideration  that the  renewal is being made on an "as is" basis
        without any tenant improvement  allowance,  rental  concessions,  or the
        like.

           b. In the event the parties cannot agree on Fair Market Rental Value,
either  Landlord or Tenant may, by notice to the other,  commence an arbitration
proceeding to determine Fair Market Rental Value as follows:

                i. The  arbitration  shall be conducted by a three-member  panel
        composed  of licensed  Colorado  real estate  brokers,  whose  brokerage
        activities for the last ten years have concentrated in office leasing in
        the Central Business District of Denver,  Colorado. Each of Landlord and

                                       10

        Tenant shall, by notice to the other, identify one such broker to act as
        an arbitrator. Within five days of such appointment, the two arbitrators
        so  selected  shall  select a third  arbitrator  meeting  the  preceding
        qualifications,  who shall act as chairman of the arbitration  panel. In
        the event a party fails to appoint an arbitrator,  the arbitration shall
        be conducted by the single  arbitrator  appointed by the other party. In
        the event the two arbitrators  cannot select a third  arbitrator  within
        the applicable  time period,  such  arbitrator  shall be selected by the
        President  of the Denver  Board of  Realtors  upon the request of either
        party.

                ii. The arbitrators shall be impartial.

                iii. Within 15 days of the appointment of the third  arbitrator,
        each of the two  party-appointed  arbitrators shall prepare a memorandum
        setting forth such arbitrator's estimate of the Fair Market Rental Value
        of the  Premises,  including  all  comparable  leases  relied on and the
        reasoning and rationale of such arbitrator.

                iv.  Within five days  following  the delivery of the reports of
        the two party-appointed  arbitrators to the third arbitrator,  the third
        arbitrator  shall  select as the Fair  Market  Rental  Value the  amount
        determined by one or the other of the party-appointed arbitrators which,
        in the determination of the third arbitrator,  is closest to Fair Market
        Rental Value as determined by such third arbitrator.

                v. The place of the arbitration  will be in the Central Business
        District  of Denver,  Colorado.  The rules of the  arbitration  shall be
        established  as needed  by the third  arbitrator.  The  decision  of the
        arbitrators  shall be final,  binding,  and  conclusive  on Landlord and
        Tenant and shall not be  reviewable  by a court other than on account of
        fraud. Once the arbitrators have been appointed, neither the parties nor
        their respective  counsel may contact the arbitrators  except in writing
        with  copies  to  the  other  party  and  its  counsel  or in  telephone
        conversations   or  meetings  with  counsel  for  both  of  the  parties
        participating.  The fees of the two party-appointed arbitrators shall be
        paid  by  the  respective  appointing  party.  The  fees  of  the  third
        arbitrator  shall  be  shared  equally  by  the  parties.  All  expenses
        authorized by the third  arbitrator in connection  with the  arbitration
        shall be shared by the parties.

     14.  Early  Termination  Option.  Subject to Tenant's  compliance  with the
          --------------------------
provisions  of this  paragraph,  Tenant  may,  from time to time,  surrender  to
Landlord  all or a portion of the  Premises  (the  "Surrendered  Premises").  To
exercise  such early  termination  option,  Tenant shall comply with each of the
following:

           a.  Tenant  shall  provide  written  notice to Landlord at least nine
calendar months in advance of the date of termination.

           b. The date of termination  shall be as of the last day of a calendar
month.

                                       11

           c. The  Surrendered  Premises  shall  include all of the space on the
floor or floors on which the Surrendered Premises is located.

           d. On the  first  day of the  month in  which  the  termination  date
occurs,  Tenant  shall  pay to  Landlord  as  Additional  Rent  the  unamortized
Transaction Costs with respect to the Surrendered Premises.  "Transaction Costs"
means all of the following costs actually paid by Landlord and not reimbursed by
Tenant:  TI Allowance,  Excess Costs,  real estate  brokerage  commissions,  and
Landlord's legal expenses. As of the date of this Amendment, the TI Allowance is
$32.70 per rentable square foot, and real estate brokerage commissions are $6.65
per rentable square foot; Landlord's legal expenses will be determined as of the
execution of this Amendment.  Because the actual  Transaction  Costs will not be
known until after the Tenant  Improvements  are  completed,  upon the request of
either party,  the parties will confirm in writing the final actual  Transaction
Costs.  All  Transaction  Costs shall first be allocated on a per square footage
basis (and on a temporal basis to account for different  Commencement  Dates) as
between  the  Surrendered  Premises  and the balance of the  Premises,  and such
Transaction  Costs allocated to the Surrendered  Premises shall then be prorated
by multiplying such expenses by a fraction, the numerator of which is the number
of calendar  months  remaining in the Term divided by the total number of months
from the first month for which Base Rent was paid  through the last month of the
Term.

           e. The  termination  right  granted  by this  paragraph  shall not be
effective until after May 31, 2008.

           f. At the time Tenant makes the payment required by subparagraph (d),
above,  Tenant shall pay Landlord a termination  fee equal to the amount of Rent
for the  Surrendered  Premises  which  would  have been due for the first  three
months following the termination date but for such early termination.

     15.  Parking.  Landlord  grants to Tenant the right,  in common with others
          -------
authorized by Landlord,  to use the parking  facilities  owned by Landlord which
are part of the Property.  As of the commencement of this Lease,  Landlord shall
continue to provide to Tenant parking in 20 reserved  spaces and 32 non-reserved
spaces as provided  in the  Original  Lease (as  amended).  In the event  Tenant
expands the Premises subject to this Lease, additional parking shall be provided
at a ratio of one parking space per each 1,208 rentable square feet added to the
Premises.  In the event Tenant exercises its rights of early  termination  under
paragraph 14, above,  the number of parking spaces provided to Tenant under this
Lease shall be reduced at a ratio of one parking  space per each 1,208  rentable
square feet  subtracted  from the Premises (to the extent the Premises is 42,660
square  feet or  larger)  or at the  ratio  of one  parking  space  per each 820
rentable  square feet subtracted from the Premises to the extent the Premises is
less than 42,660  square  feet.  Tenant  shall pay  Landlord the fee for parking
monthly, in advance,  with monthly Rent. Through December 31, 2002, such parking
fee shall be the same as charged on September 18, 2001 under the Original Lease.
Thereafter,  the parking fee will be adjusted to the then  current  market rate.
Thereafter,  any  adjustment  in market rate shall be limited,  on a  cumulative

                                       12

basis, to 4% per year. Parking spaces which are currently  allocated to and used
by Tenant's subtenants  D.C.  Dudley & Associates and Summo  Minerals, shall
continue to be made  available to them for the Term of this Lease at the parking
fee determined under this paragraph.

           a.  Landlord,  at  its  sole  election,  shall  designate  types  and
locations of parking spaces within the parking facilities provided, however, any
such  designation  shall be uniformly  applied and shall not unfairly  favor any
tenant in the  Building.  Landlord  shall not move the  location  of Tenant's 20
reserved  parking  spaces and the reserved  parking  spaces which are  currently
allocated to and used by Tenant's subtenants,  D.C. Dudley &  Associates and
Summo Minerals,  unless  required to do so by events not in Landlord's  control;
provided,  however,  that  Landlord  will use good faith  efforts to return such
spaces to their  original  location as soon as practical.

           b.  In  addition  to the  limited  rate  increases  in  parking  fees
described above,  Landlord may increase the parking fee by the amount of any fee
or charge levied, assessed,  imposed, or required to be paid to any governmental
authority on account of the parking of motor vehicles.

           c. If  requested by  Landlord,  Tenant  shall notify  Landlord of the
license plate number,  year, make, and model of each automobile  entitled to use
the parking  facilities  pursuant to this Lease,  and if  requested by Landlord,
such automobile shall be identified by identification tags and stickers and only
such designated automobiles will be permitted to use the parking facilities.

           d. Parking  facilities are provided solely for the  accommodation  of
Tenant.   Landlord  disclaims  any  responsibility  or  liability  of  any  kind
whatsoever,  from whatever cause,  with respect to automobile  parking areas and
adjoining streets, sidewalks,  driveways, property, and passage ways, or the use
thereof by Tenant or  Tenant's  employees,  customers,  agents,  contractors  or
invitees.

During  the  period  CRESA is  providing  construction  management  services  as
contemplated by paragraph 10(a),  above, a  representative  of CRESA may park in
the loading dock area of the Building  pursuant to  reasonable  requirements  of
Landlord, including sign-in procedures and depositing keys for such vehicle with
Building security.

     16. Storage Space  Agreement.  Tenant entered into a certain  Storage Space
         ------------------------
Agreement  dated  September  30,  1991,  with  Equitable,  the then owner of the
Building.  The Storage Space  Agreement  shall continue in effect at the current
rate of $10.00 per square foot. The Storage Space  Agreement  shall terminate as
of the last day of the Term of this  Lease.  Landlord  may  change the amount of
rent payable with respect to Storage Space  Agreement,  provided such rent shall
not be  increased  on a  cumulative  basis more than 3% per year from January 1,
2002.

                                       13

     17. Hazardous Materials.
         -------------------

           a. Definition of Hazardous Materials.  The term "Hazardous Materials"
              ---------------------------------
for purposes  hereof shall mean any chemical,  substance,  materials or waste or
component thereof which is now or hereafter listed,  defined or regulated as all
hazardous or toxic chemical, substance,  materials or waste or component thereof
by any federal,  state or local governing or regulatory body having jurisdiction
("Governmental  Body"),  or  which  would  trigger  any  employee  or  community
"right-to-know"  requirements  adopted by any such  body,  or for which any such
body has adopted any  requirements  for the  preparation  or  distribution  of a
materials  safety data sheet ("MSDS").  Landlord  represents that, to its actual
knowledge,  there are no Hazardous Materials currently existing on the Property,
except as may be  disclosed  in any report or  document  delivered  to Tenant by
Landlord,  Hazardous  Materials  brought to the  Premises  by Tenant or Tenant's
agents,  commercially  reasonable  amounts  of  Hazardous  Materials  which  are
constituents  of  cleaners,   solvents,  or  ink,  in  commercially   reasonable
quantities,  as used in normal  day-to-day  operations  of the  Building and the
Premises,  or Hazardous  Materials  contained in office  equipment,  appliances,
electrical fixtures, all of which are not in violation of applicable law.

           b. No Hazardous  Materials.  Tenant shall not transport,  use, store,
              -----------------------
maintain,  generate,  manufacture,  handle,  dispose,  release, or discharge any
Hazardous  Materials.  However,  the foregoing provisions shall not prohibit the
transportation  to and from, and use,  storage,  maintenance and handling within
the Premises of Hazardous Materials customarily used in the business or activity
expressly  permitted to be undertaken in the Premises under Article 6, provided:
(a)  such  Hazardous  Materials  shall  be  used  and  maintained  only  in such
quantities as are  reasonably  necessary for such  permitted use of the Premises
and the ordinary  course of Tenant's  business  therein,  strictly in accordance
with  applicable  Law,  highest  prevailing  standards,  and the  manufacturers'
instructions  therefor,  (b) such Hazardous  Materials shall not be disposed of,
released or discharged in the Building, and shall be transported to and from the
Premises  in  compliance  with  all  applicable  Laws,  and  as  Landlord  shall
reasonably  require,  (c) if any  applicable  Law or  Landlord's  trash  removal
contractor  requires that any such Hazardous Materials be disposed of separately
from ordinary trash, Tenant shall make arrangements at Tenant's expense for such
disposal  directly  with a qualified and licensed  disposal  company at a lawful
disposal  site (subject to  scheduling  and approval by  Landlord),  and (d) any
remaining such Hazardous  Materials  shall be completely,  properly and lawfully
removed from the Building upon expiration or earlier  termination of this Lease.
Any clean up,  remediation and removal work shall be subject to Landlord's prior
written approval (except in emergencies), and shall include, without limitation,
any  testing,  investigation,  and the  preparation  and  implementation  of any
remedial action plan required by any Governmental Body or reasonably required by
Landlord.  If Landlord or any Lender or Governmental body arranges for any tests
or studies showing,  that this Article has been violated by Tenant, Tenant shall
pay for the costs of such tests.

                                       14

           c. Notices To Landlord. Tenant shall promptly notify Landlord of: (i)
              -------------------
any enforcement,  cleanup or other regulatory  action taken or threatened by any
governmental  or  regulatory  authority  with  respect  to the  presence  of any
Hazardous  Materials on the Premises or the  migration  thereof from or to other
property, (ii) any demands or claims made or threatened by any party relating to
any loss or injury resulting from any Hazardous Materials on the Premises, (iii)
any  release,  discharge  or  non-routine,  improper  or  unlawful  disposal  or
transportation  of  any  Hazardous  Materials  on or  from  the  Premises  or in
violation of this Article,  and (iv) any matters where Tenant is required by Law
to give a notice to any Governmental Body respecting any Hazardous  Materials on
the Premises. Landlord shall have the right (but not the obligation) to join and
participate,  as a party,  in any legal  proceedings  or actions  affecting  the
Premises initiated in connection with any  environmental,  health or safety law.
At such times as Landlord may reasonably request,  Tenant shall provide Landlord
with a  written  list,  certified  to be  true  and  complete,  identifying  any
Hazardous Materials then used, stored, or maintained upon the Premises,  the use
and approximate  quantity of each such  materials,  a copy of any MSDS issued by
the manufacturer therefor, and such other information as Landlord may reasonably
require or as may be required by Law.

           d.  Indemnifications.  Tenant  will  indemnify,  defend  (by  counsel
               ----------------
reasonably  acceptable  to  Landlord),  protect,  and hold  Landlord and each of
Landlord's partners, employees, agents, attorneys,  successors and assigns, free
and  harmless  from and  against  any and all  claims,  liabilities,  penalties,
forfeitures,  losses  or  expenses  (including  attorney's  fees) or death of or
injury  to any  person or damage to any  property  whatsoever,  arising  from or
caused in whole or in part directly or indirectly, by:

                i. the  presence  in,  on,  under,  or  about  the  Premises  or
        discharge in or from the Premises of any Hazardous  Materials placed in,
        under or  about,  the  Premises  by  Tenant  or at  Tenant's  direction,
        excluding any tenant improvement work done by Landlord; or

                ii. Tenant's use, analysis, storage,  transportation,  disposal,
        release,  threatened  release,  discharge,  or  Generation  of Hazardous
        Materials to, in, on, under, about, or from the Premises; or

                iii. Tenant's failure to comply with any Hazardous Materials Law
        applicable hereunder to Tenant.

Landlord will indemnify,  defend (by counsel  reasonably  acceptable to Tenant),
protect,  and hold Tenant and each of  Tenant's  employees,  agents,  attorneys,
successors  and assigns,  free and harmless from and against any and all claims,
liabilities  penalties,  forfeitures,  losses or expenses (including  attorney's
fees) or death of or injury to any person or damage to any property  whatsoever,
arising from or caused in whole or in part, directly or indirectly, by

                                       15

                        (1) the  presence in, on, under or about the Premises or
                the  Building  or  discharge  in or  from  the  Premises  or the
                Building of any Hazardous  Materials  existing as of the date of
                this  Amendment  (and not placed or released on the  Premises by
                Tenant) or placed,  in, on, under,  or about the Premises or the
                Building by Landlord or at Landlord's direction; or

                        (2) Landlord's use, analysis,  storage,  transportation,
                disposal,  release,  threatened release, discharge or generation
                of  Hazardous  Materials  to, in, on,  under,  about or from the
                Premises or the Building; or

                        (3)  Landlord's  failure  to comply  with any  Hazardous
                Materials Law.

The obligations of each party ("Indemnifying  Party") pursuant to this paragraph
includes,  without  limitation,  and whether  foreseeable or unforeseeable,  all
costs  of any  required  or  necessary  repair,  cleanup  or  detoxification  or
decontamination  of the  Premises  or the  Building,  and  the  preparation  and
implementation  of any  closure,  remedial  action  or other  required  plans in
connection therewith,  and survives the expiration or earlier termination of the
term of the Lease.

     18.  Alterations.  Tenant  shall make no  alterations  or  additions to the
          -----------
Premises without the prior written consent of Landlord,  which consent shall not
be unreasonably  withheld.  Tenant shall complete any alterations  authorized by
Landlord in good and workman like manner,  using  contractors  and pursuant to a
general contract reasonably acceptable to Landlord, fully paid for and free from
liens,  in accordance  with plans and  specifications  approved by Landlord.  In
exercising  Landlord's  reasonable  discretion under this paragraph 18, Landlord
may take into consideration the following, without limitation: the effect of any
proposed alteration or addition on any base system of the Building, the need for
additional  power,  the need to rebalance  the HVAC system,  the effect on other
portions of the Building, the business reputation and financial qualification of
the contractors and their  experience  with the Building,  and similar  factors.
Tenant  shall  give  Landlord  at  least 10 days  prior  written  notice  of the
commencement  of any  alterations to afford  Landlord the  opportunity to post a
notice  of  nonresponsibility,  which  notice  Tenant  will  maintain  in  place
throughout the period of construction. Tenant indemnifies Landlord on account of
any  mechanics',  materialmen's,  or  similar  lien or  encumbrance  to be filed
against the Premises or Building in connection  with any such work undertaken by
Tenant.  Tenant shall remove any such lien to Landlord's  satisfaction within 20
days from its  recordation,  and if  Tenant  fails to do so,  Landlord  may take
whatever  action  Landlord deems  necessary to remove such lien or  encumbrance,
without being  responsible to investigate its validity.  All amounts so paid and
Landlord's  costs,  including  attorneys' fees, shall be deemed  additional rent
under  this  Lease and be  payable  in full  upon  demand.  Tenant  shall not be
required to remove any  alterations or additions made by Tenant pursuant to this
paragraph unless removal is made a condition of Landlord's approval.

                                       16

     19. Compliance with ADA. Notwithstanding anything to the contrary contained
         -------------------
in this Lease, Landlord and Tenant agree that responsibility for compliance with
the Americans  With  Disabilities  Act of 1990 (the "ADA") shall be allocated as
follows: (i) Landlord shall be responsible for compliance with the provisions of
Title III of the ADA for all Common Areas, including exterior and interior areas
of the  Building  not  included  within the  Premises  or the  premises of other
tenants;  (ii) Landlord shall be responsible  for compliance with the provisions
of  Title  III of the ADA for any  construction,  renovations,  alterations  and
repairs made within the Premises if such construction,  renovations, alterations
or repairs  are made by  Landlord  for the  purpose of  improving  the  Building
generally or are done as Landlord's  Work and the plans and  specifications  for
the Landlord's  Work were prepared by Landlord's  architect or space planner and
were not provided by Tenant's architect or space planner;  (iii) Tenant shall be
responsible  for compliance  with the provisions of Title III of the ADA for any
construction,  renovations,  alterations and repairs made within the Premises if
such construction,  renovations, alterations and repairs are made by Tenant, its
employees, agents or contractors, at the direction of Tenant or done pursuant to
plans and specifications prepared or provided by Tenant or Tenant's architect or
space planner.

     20. General  Office Use.  Paragraph 11 of the Original Lease permits Tenant
         -------------------
to  occupy  and use the  Premises  for  general  offices  and no  other  purpose
whatsoever. "General office use" does not include use as a telephone call center
or other use which would  increase the level of occupancy of the Premise to more
than one person per 170 square feet.

     21.  Rules  and   Regulations.   Landlord  may  adopt  Building  Rules  and
          ------------------------
Regulations  and  janitorial  specifications  from time to time  which  shall be
applicable  to all tenants in the  Building  to the extent of any  inconsistency
between  the  provisions  of this  Lease and the  provisions  of such  Rules and
Regulations,  this  Lease  shall  control.  A copy  of  the  current  Rules  and
Regulations and janitorial  specifications  is attached to this Lease as Exhibit
                                                                         -------
D.
- -

     22.  Surrender  of Premises.  Upon the  expiration  of the Term,  or sooner
          ----------------------
termination  of the Lease,  Tenant  shall quit and  surrender  to  Landlord  the
Premises,  broom clean,  in good order and  condition,  normal wear and tear and
damage by fire and other casualty excepted. All leasehold improvements and other
fixtures, such as light fixtures and HVAC equipment,  wall coverings,  carpeting
and drapes, in or serving the Premises, whether installed by Tenant or Landlord,
shall be  Landlord's  property  and  shall  remain,  all  without  compensation,
allowance or credit to Tenant.  Any property not removed shall be deemed to have
been  abandoned  by Tenant and may be  retained  or  disposed  of by Landlord at
Tenant's expense free of any and all claims of Tenant, as Landlord shall desire.
All property not removed from the Premises by Tenant may be handled or stored by
Landlord at Tenant's  expense  and  Landlord  shall not be liable for the value,
preservation,  or safekeeping  thereof. At Landlord's option all or part of such
property may be conclusively  deemed to have been conveyed by Tenant to Landlord
as if by bill of sale without  payment by Landlord.  The Tenant hereby waives to
the maximum  extent  allowable the benefit of all laws now or hereafter in force
in this state or elsewhere  exempting  property  from  liability for rent or for
debt.  Tenant's Liebert air cooling unit presently located on the Premises shall

                                       17

be deemed to be equipment  owned by Tenant,  and not a leasehold  improvement or
fixture.  Tenant shall,  upon the  termination of the Lease with respect to that
portion of the Premises  where such Liebert unit is located  remove such Liebert
unit and repair any damage to the Premises caused by such removal.

     23. Cooperation Regarding Operation of HVAC System.  Paragraph 11(k) of the
         ----------------------------------------------
Original Lease is revised to read in its entirety as follows:

     Tenant  shall  cooperate in all reasonable  ways  with Landlord to
     assure  the effective   operation  of  the   Building's   heating,
     ventilating, and air-conditioning  system.  Such cooperation shall
     include closing of window coverings during the cooling season; not
     covering registers or returns; not  making substantial  changes in
     the  location of  electrical  equipment, lights,  and  other  heat
     generators  compared  to  the  plans; not  accessing  or  changing
     thermostat  settings without input from  Building  management; and
     not using space heaters or other substantial generators of heat in
     the Premises

     24.  Landlord's  Obligation to Repair. To the extent any part of the Tenant
          --------------------------------
Improvements  contemplated  by this Amendment and paid for with the TI Allowance
constitute part of the Building's  base utility  systems or structural  element,
Landlord,  and not Tenant,  shall be obligated to maintain,  repair, and replace
such  items as  contemplated  by the  second  sentence  of  paragraph  12 of the
Original Lease.

     25.  Assignment  and  Assumption.  Parish is the original  tenant under the
          ---------------------------
Original  Lease (as defined in  paragraph 1, above).  Parish  hereby  assigns to
Tenant all of Parish's  rights and  obligations  of whatsoever  nature under the
Original  Lease  as  modified  by this  Amendment.  Tenant  hereby  assumes  all
obligations  of Parish under the Original Lease and this Amendment and agrees to
timely pay and perform all  obligations  of Parish and Tenant under the Original
Lease and this  Amendment.  Landlord  shall not be required to provide to Parish
any  notices  under  the  Lease,  including,   without  limitation,   notice  of
non-payment or non-performance or any notice of default.


     26. Substitute Premises. Paragraph 26 of the Original Lease is deleted.
         -------------------

     27. Force Majeure. Landlord shall be excused for the period of any delay in
         -------------
the  performance of any  obligation  hereunder when prevented from so doing by a
cause or causes  beyond  its  control  ("Force  Majeure"),  including  all labor
disputes,  civil  commotion,  war,  war-like  operations,  invasion,  rebellion,
hostilities,  military or usurped power, sabotage,  governmental  regulations or
controls, fire or other casualty,  inability to obtain any material, services or
financing,  or through acts of God.  Tenant shall similarly be excused for delay
in the  performance  of any  obligation  hereunder  by reason of Force  Majeure;
provided:

                                       18

           a.  Nothing  contained  in this  paragraph or elsewhere in this Lease
shall be deemed to excuse or permit any delay in the payment of the Rent, or any
delay in the cure of any default which may be cured by the payment of money; and

           b. No reliance by Tenant upon this paragraph  shall limit or restrict
in any way Landlord's right of self-help as provided in this Lease.

     28. Certifications and Covenants by Tenant. As additional consideration for
         --------------------------------------
this Amendment, Tenant hereby certifies that:

           a. The Lease is in full force and effect,  unmodified  except by this
Amendment, and binding on Tenant. Tenant ratifies the Lease.

           b. There are no uncured  defaults  on the part of  Landlord or Tenant
under the Lease.

           c. There are no existing offsets or defenses which Tenant has against
the enforcement of the Lease by Landlord.

     29.  Authority.  Each of Landlord and Tenant,  and each person  signing for
          ---------
them, hereby warrants and represents to the other that the individual signing on
behalf of that party is fully authorized to sign on behalf of, and to bind, such
party and  that,  when  signed by the  parties,  this  Amendment  shall be fully

binding  on the  party  on whose  behalf  this  Amendment  is  executed  by such
individual.

     30. Exhibits.  The parties  acknowledge and agree that each of the Exhibits
         --------
attached to this  Agreement  form an integral part of this Agreement and by this
reference are incorporated herein as if set forth in full verbatim.

                           Exhibit A:       Suite 420
                           Exhibit B:       Operating Expense Exclusions
                           Exhibit C:       ASHRAE Standards
                           Exhibit D:       Rules and Regulations and Janitorial
                                            Standards

     31. Execution by Facsimile and Counterparts. This Amendment may be executed
         ---------------------------------------
in one or more counterparts,  all of which shall, taken together, constitute one
and the same  agreement.  The parties intend that delivery of this Amendment may
be effected by facsimile  transmission  and that a facsimile copy which has been
executed by the transmitting party shall constitute an original.

                                       19

     32. Notice Addresses. Addresses for notice to Landlord and Tenant under the
         ----------------
Lease shall be as follows:

                  Landlord:        Massachusetts Mutual Life Insurance Company
                                   c/o Cornerstone Real Estate Advisers, Inc.
                                   10866 Wilshire Boulevard
                                   Suite 800
                                   Los Angeles, CA 90024
                                   Attn: Asset Manager - Denver Financial Center

                  with a copy to:  Transwestern Commercial Services
                                   1775 Sherman Street, Lobby Level
                                   Denver, CO 80203


                  Tenant:          St. Mary Land & Exploration Company
                                   1776 Lincoln Street, Suite 700*
                                   Denver, CO 80203
                                   Attn:  Vice President - Administration

                  with copy to:    St. Mary Land & Exploration Company
                                   1776 Lincoln Street, Suite 700
                                   Denver, CO 80203
                                   Attn:  General Counsel

                            *Suite 1100 prior to delivery of 7th Floor to Tenant

     33. Entire Agreement.  This Amendment,  together with the Exhibits attached
         ----------------
hereto, constitutes the entire agreement of the parties and supersedes all prior
understandings and agreements with respect to the subject matter hereof.

                                       20

     34. No Amendments. No change,  modification,  or addition of this Amendment
         -------------
shall be  enforceable  unless it is in writing  and signed by the party  against
whom enforcement is sought.

LANDLORD:                                      TENANT:
- --------                                       ------

MASSACHUSETTS MUTUAL LIFE                      ST. MARY LAND & EXPLORATION
INSURANCE COMPANY                              COMPANY, a Delaware corporation


By:      CORNERSTONE REAL ESTATE
         ADVISERS, INC., its agent             By: /s/ MARK A. HELLERTEIN
                                                  ------------------------------
                                               Name Typed:  Mark A. Hellerstien
         By: /s/ ROBERT K. GIFFIN              Title:  President
             -------------------------------   Date:  12/14/01
         Name Typed:  Robert K. Giffin              ----------------------------
         Title:  Vice President
         Date:  12/17/01
              ------------------------------

                                       21

EX-12

                                                                    EXHIBIT 12.1


                     St. Mary Land & Exploration Company
               Computation of Ratios of Earnings to Fixed Charges
                             (dollars in thousands)


                                                        Years Ended December 31,
                                      ------------------------------------------------------
                                         2002       2001       2000       1999       1998
                                      ---------- ---------- ---------- ---------- ----------
Earnings:
   Income (loss) from continuing
      operations                       $  27,560  $  40,459  $  55,620  $      82  $  (8,831)
   Income tax expense (benefit)           15,019     21,829     33,667       (406)    (5,415)
   Total fixed charges                     4,714        904      1,043      1,451      1,854
   Less capitalized interest                 427        473        548        270          -                                                                                              -
                                      ---------- ---------- ---------- ---------- ----------
Total earnings                         $  46,866  $  62,719  $  89,782  $     857  $ (12,392)
                                      ========== ========== ========== ========== ==========

Fixed charges:
   Interest expense                    $   4,287  $     431  $     495  $   1,181  $   1,854
   Capitalized interest                      427        473        548        270          -                                                                                               -
                                      ---------- ---------- ---------- ---------- ----------
Total fixed charges                    $   4,714  $     904  $   1,043  $   1,451  $   1,854
                                      ========== ========== ========== ========== ==========

Ratio of earnings to fixed charges           9.9       69.4       86.1      0.6(1)   (6.7)(1)


Note:    For purposes of computing St. Mary Land & Exploration Company's
         ratios of earnings to fixed charges, "earnings" represent pretax
         earnings from continuing operations plus fixed charges (excluding
         capitalized interest). "Fixed charges" represent interest expensed and
         capitalized. Interest expense includes the portion of operating rental
         expense that St. Mary believes is representative of the interest
         component of rental expense.

(1)      Earnings in 1999 and 1998 were inadequate to cover fixed charges, with
         a deficiency of $0.6 million and $14.3 million, respectively.

EX-21

                                                                    EXHIBIT 21.1


                                  SUBSIDIARIES
                                       OF
                     ST. MARY LAND & EXPLORATION COMPANY


A.   Wholly-owned subsidiaries of St. Mary Land & Exploration Company, a
     Delaware corporation:

     1.   St. Mary Minerals, Inc., a Colorado corporation
     2.   Parish Corporation, a Colorado corporation
     3.   St. Mary Operating Company, a Colorado corporation
     4.   Nance Petroleum Corporation, a Montana corporation
     5.   St. Mary Energy Company, a Delaware corporation
     6.   Roswell LLC, a Texas limited liability company
     7.   Four Winds Marketing LLC, a Colorado limited liability company
     8.   GNK Acquisition Corp., a Texas corporation

B.   Other subsidiaries of St. Mary Land & Exploration Company

     1.   Box Church Gas Gathering LLC, a Colorado limited liability company
          (58.6754%)
     2.   Centennial Oil & Gas LLC, a Texas limited liability company (50%)
     3.   Trinity River Services LLC, a Texas limited liability company (25%)

C.   Wholly-owned subsidiaries of Nance Petroleum Corporation

     1.   NPC Inc., a Colorado corporation

D.   Wholly-owned subsidiaries of Parish Corporation:

     1.   Natasha Corporation, a Colorado corporation
     2.   Lucy Corporation, a Colorado corporation

E.   Partnership interests held by Parish Corporation:

     1.   Hilltop Investment Partners, a Colorado general partnership (50%)
     2.   C-470 Venture, a Colorado general partnership (68.858%)
     3.   ParishVentures, a Colorado general partnership (100%)

F.   Subsidiaries of Lucy Corporation:

     1.   St. Mary East Texas LP, a Texas limited partnership (99%) (the
          remaining 1% interest is held by St. Mary Land & Exploration
          Company)

EX-23

                                                                    EXHIBIT 23.1


                          INDEPENDENT AUDITORS' CONSENT



We consent to the  incorporation  by reference  in  Registration  Statement  No.
333-88712 on Form S-3 and Nos. 033-61850,  333-30055, 333-58273 and 333-35352 on
Form S-8 of St. Mary Land & Exploration Company of our report dated February
19, 2003,  related to the  consolidated  financial  statements  of St. Mary Land
&  Exploration  Company  as of and for the year  ended  December  31,  2002,
appearing  in this  Annual  Report on Form 10-K of St.  Mary for the year  ended
December 31, 2002.


/s/ DELIOTTE & TOUCHE LLP



Denver, Colorado,
March 12, 2003

EX-23

                                                                    Exhibit 23.2


            INFORMATION ABOUT LACK OF CONSENT OF ARTHUR ANDERSEN LLP

         The audit report of Arthur Andersen LLP dated February 18, 2002 (the
"Audit Report") with respect to the consolidated financial statements of St.
Mary Land & Exploration Company ("St. Mary") as of December 31, 2001 and
2000 and for each of the three years in the period ended December 31, 2001
included in St. Mary's Annual Report on Form 10-K for the year ended December
31, 2002 (the "2002 Form 10-K") is a copy of the Audit Report previously issued
by Arthur Andersen LLP and included with Arthur Andersen LLP's consent in St.
Mary's Annual Report on Form 10-K for the year ended December 31, 2001 filed
with the Securities and Exchange Commission ("SEC") on March 19, 2002 (the "2001
Form 10-K") and St. Mary's Annual Report on Form 10-K/A for the year ended
December 31, 2001 filed with the SEC on March 25, 2002 (the "2001 Form 10-K/A").
The Audit Report has not been reissued by Arthur Andersen LLP for inclusion with
the 2002 Form 10-K, but a copy of the Audit Report is included in the 2002 Form
10-K in reliance on Rule 2-02(e) of Regulation S-X promulgated by the SEC.

         The 2002 Form 10-K is incorporated by reference in St. Mary's
previously filed Registration Statements on Form S-8 (Registration Nos.
033-61850, 333-30055, 333-58273, 333-35352 and 333-88780) and Registration
Statement on Form S-3 (Registration No. 333-88712) (collectively, the
"Registration Statements"). Although St. Mary obtained the consent of Arthur
Andersen LLP to the incorporation by reference in the Registration Statements of
the Audit Report included in the 2001 Form 10-K and 2001 Form 10-K/A, after
reasonable efforts St. Mary has not been able to obtain the consent of Arthur
Andersen LLP to the incorporation by reference in the Registration Statements of
the Audit Report included in the 2002 Form 10-K. Therefore, in reliance on Rule
437a under the Securities Act of 1933 (the "Securities Act") St. Mary has not
filed a consent of Arthur Andersen LLP with the 2002 Form 10-K. As a result,
with respect to transactions in St. Mary securities pursuant to the Registration
Statements that occur subsequent to the date that the 2002 Form 10-K is filed
with the SEC, investors will not be able to recover against Arthur Andersen LLP
under Section 11 of the Securities Act for any untrue statement of a material
fact contained in the financial statements audited by Arthur Andersen LLP as
indicated in the Audit Report and incorporated by reference in the Registration
Statements from the 2002 Form 10-K, or any omission to state a material fact
required to be stated therein. In addition, due to the significant decline in
size of Arthur Andersen LLP and their termination of operations after having
been found guilty in June 2002 of federal obstruction of justice charges arising
from the U.S. government's investigation of Enron, investors are unlikely to be
able to exercise any effective remedies against or collect judgments from Arthur
Andersen LLP.



March 12, 2003

EX-23

                                                                    EXHIBIT 23.3


                   CONSENT OF INDEPENDENT PETROLEUM ENGINEERS



The  undersigned  hereby  consents to the references to our firm in the form and
context in which they appear in the Annual  Report on Form 10-K of St. Mary Land
and Exploration  Company for the year ended December 31, 2002. We hereby further
consent to the use of  information  contained in our  reports,  as of January 1,
2003,  2002 and 2001 setting  forth the estimates of revenues from St. Mary Land
&  Exploration  Company's  oil and gas reserves.  We further  consent to the
incorporation  by  reference  thereof  into  St.  Mary  Land  &  Exploration
Company's   Form  S-8   (Registration   Statement  No.   033-61850),   Form  S-8
(Registration  Statement No.  333-30055),  Form S-8 (Registration  Statement No.
333-58273),  and Form S-8  (Registration  Statement No.  333-35352) and Form S-3
(Registration Statement No. 333-88712).




                                                     Very truly yours,

                                                /s/ RYDER SCOTT COMPANY, L.P.
                                                -----------------------------
                                                RYDER SCOTT COMPANY, L.P.

Denver, Colorado,
    March 12, 2003.